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| Net earnings for the period | — | | | — | | | — | | | — | | | | | | — | | | — | |
| Dividends to common shareholders | — | | | — | | | — | | | — | | | () | | | — | | | — | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | () | | | — | |
| Common stock-based award activity | | | | | | | | | | — | | | — | | | — | | | — | |
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| Shares withheld for taxes | () | | | — | | | () | | | — | | | — | | | — | | | — | |
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| Balance, March 29, 2024 | | | | $ | | | | $ | | | | $ | () | | | $ | | | | $ | () | | | $ | | |
| Net earnings for the period | — | | | — | | | — | | | — | | | | | | — | | | — | |
| Dividends to common shareholders | — | | | — | | | — | | | — | | | () | | | — | | | — | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | () | | | — | |
| Common stock-based award activity | | | | — | | | | | | — | | | — | | | — | | | — | |
| Common stock repurchases | () | | | — | | | — | | | () | | | — | | | — | | | — | |
| Shares withheld for taxes | — | | | — | | | () | | | — | | | — | | | — | | | — | |
| Change in noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | | |
| Balance, June 28, 2024 | | | | $ | | | | $ | | | | $ | () | | | $ | | | | $ | () | | | $ | | |
| Net earnings for the period | — | | | — | | | — | | | — | | | | | | $ | — | | | $ | — | |
| Dividends to common shareholders | — | | | — | | | — | | | — | | | () | | | — | | | — | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | | — | |
| Common stock-based award activity | | | | — | | | | | | — | | | — | | | — | | | — | |
| Common stock repurchases | () | | | — | | | — | | | () | | | — | | | — | | | — | |
| Shares withheld for taxes | () | | | — | | | () | | | — | | | — | | | — | | | — | |
| Change in noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | | |
| Balance, September 27, 2024 | | | | $ | | | | $ | | | | $ | () | | | $ | | | | $ | () | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-In Capital | | Treasury Shares | | Retained Earnings | | Accumulated
Other
Comprehensive
Loss | | Noncontrolling
Interests |
| Shares Outstanding | | Amount |
| Balance, December 31, 2022 | | | | $ | | | | $ | | | | $ | () | | | $ | | | | $ | () | | | $ | | |
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|
| Net earnings for the period | — | | | — | | | — | | | — | | | | | | — | | | — | |
| Dividends to common shareholders | — | | | — | | | — | | | — | | | () | | | — | | | — | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | | | | — | |
| Common stock-based award activity | | | | — | | | | | | — | | | — | | | — | | | — | |
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| | | | | | | |
| Denominator | | | | | | | |
| Weighted average common shares outstanding used in basic earnings per share | | | | | | | | | | | |
| Incremental common shares from: | | | | | | | |
| Assumed exercise of dilutive options and vesting of dilutive Stock Awards | | | | | | | | | | | |
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Share Repurchase Program
On February 17, 2022, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to million shares of the Company's outstanding common stock from time to time on the open market or in privately negotiated transactions. On January 23, 2024, the Company’s Board of Directors increased the number of shares authorized under the share repurchase program by an additional million shares, with million shares remaining authorized under the share repurchase program as of September 27, 2024. There is no expiration date for the repurchase program, and the timing and amount of repurchases under the program are determined by the Company's management based on market conditions and other factors. The repurchase program may be suspended or discontinued at any time by the Board of Directors.
During the three and nine-month periods ended September 27, 2024, the Company purchased million and million shares of its common stock at an average share price of $ and $, respectively. During the three and nine-month periods ended September 29, 2023, the Company purchased million and million shares of its common stock at an average share price of $ and $, respectively.
separate business segments consisting of IOS, PT, and AHS. Our chief operating decision maker (“CODM”) assesses performance and allocates resources based on our operating segments, which are also our reportable segments. Due to the Segment Realignment, prior period segment amounts have been recast to conform to the revised segment presentation. Refer to Note 1 for further information on the realignment.Our IOS segment provides advanced instrumentation, software and services to tens of thousands of customers enabling their mission-critical workflows. These offerings include electrical test & measurement, facility and asset lifecycle software applications, connected worker safety and compliance solutions across a range of vertical end markets, including manufacturing, process industries, healthcare, utilities and power, communications and electronics, among others.
Our PT segment helps solve tough technical challenges to speed breakthroughs in a wide range of applications, from food and beverage production and manufacturing to next-generation electric vehicles and clean energy, as our customers seek new test solutions to enable the electrification and connectivity of everything. Our expertise in materials, methods and measurements are reflected in our electrical test & measurement and sensing and material technologies offered to a broad set of customers and vertical end markets, including industrial, power and energy, automotive, medical equipment, food and beverage, aerospace and defense, semiconductor, and other general industries.
Our AHS segment supplies critical workflow solutions enabling healthcare providers to deliver exceptional patient care more efficiently. Our offerings include instrument sterilization solutions, instrument tracking, biomedical test tools, radiation detection and safety monitoring, and end-to-end clinical productivity software and solutions. Our healthcare offerings help ensure critical safety standards are met, instruments and operating rooms are working at peak performance, and complex procedures are followed accurately in these mission-critical healthcare environments.
| | $ | | | | $ | | | | $ | | |
| Precision Technologies | | | | | | | | | | | |
| Advanced Healthcare Solutions | | | | | | | | | | | |
| Total | $ | | | | $ | | | | $ | | | | $ | | |
| Operating Profit: | | | | | | | |
| Intelligent Operating Solutions | $ | | | | $ | | | | $ | | | | $ | | |
| Precision Technologies | | | | | | | | | | | |
| Advanced Healthcare Solutions | | | | | | | | | | | |
| Other | () | | | () | | | () | | | () | |
| Total Operating Profit | | | | | | | | | | | |
| Interest expense, net | () | | | () | | | () | | | () | |
Loss from divestiture | | | | | | | () | | | | |
| Other non-operating expense, net | () | | | () | | | () | | | () | |
| Earnings before income taxes | $ | | | | $ | | | | $ | | | | $ | | |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fortive Corporation (“Fortive,” the “Company,” “we,” “us,” or “our”) is a provider of essential technologies for connected workflow solutions across a range of attractive end-markets. Our strategic segments - Intelligent Operating Solutions (“IOS”), Precision Technologies (“PT”), and Advanced Healthcare Solutions (“AHS”) - include well-known brands with leading positions in their markets. Our businesses design, develop, manufacture, and service professional and engineered products, software, and services, building upon leading brand names, innovative technologies, and significant market positions. We are headquartered in Everett, Washington and have a workforce of more than 18,000 research and development, manufacturing, sales, distribution, service, and administrative professionals in more than 50 countries around the world.
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. The following discussion should be read in conjunction with the MD&A and consolidated financial statements included in our 2023 Annual Report on Form 10-K. Our MD&A is divided into five sections:
•Information Relating to Forward-Looking Statements
•Overview
•Results of Operations
•Liquidity and Capital Resources
•Critical Accounting Estimates
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions, divestitures, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into, including the expected impact of trade and tariff policies; our plans to separate into two independent, publicly traded companies; new or modified laws, regulations and accounting pronouncements; impact of climate-related events or transition activities; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; impact of changes to tax laws; general economic and capital markets conditions, including expected impact of inflation or interest rate changes; impact of geopolitical developments and events, including the anticipated impact of the Ukraine/Russia conflict, conflict in the Middle East, and other hostilities; the timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.
Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include, among others, the following:
Risk Related to Our Business Operations
•Conditions in the global economy, the markets we serve, and the financial markets and banking systems may adversely affect our business and financial statements.
•If we cannot adjust our manufacturing capacity, supply chain management or the purchases required for our manufacturing activities to reflect changes in market conditions, customer demand and supply chain or transportation disruptions, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components, and services could cause production interruptions, delays and inefficiencies.
•Our financial results are subject to fluctuations in the cost and availability of commodities or components that we use in our operations.
•Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated, or experience cyclicality.
•We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products and services.
•Our growth depends in part on the timely development and commercialization and customer acceptance of new and enhanced products and services based on technological innovation.
•If we are unable to recruit and retain key employees, our business may be harmed.
•Significant disruptions in, or breaches in security of, our information technology systems have adversely affected, and in the future could adversely affect, our business.
•Defects and unanticipated use or inadequate disclosure with respect to our products (including software) or services could adversely affect our business, reputation, and financial statements.
•Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns, or inventory levels of, key distributors and other channel partners could adversely affect our financial statements.
•Our restructuring activities could have long-term adverse effects on our business.
•Work stoppages, works council campaigns, and other labor disputes could adversely impact our productivity, economic conditions, and results of operations.
•If we suffer loss to our facilities, supply chains, distribution systems, or information technology systems due to catastrophe or other events, our operations could be seriously harmed.
•If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.
•Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses, or licensing expenses or be prevented from selling products or services.
•We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our financial statements.
•Future pandemics and epidemics, and any corresponding constraints on supply chain, labor force, and the operations of our customers, suppliers, and vendors could have an adverse impact on our business and results of operations.
•Climate change, or legal or regulatory measures to address climate change, may negatively affect us.
•We use artificial intelligence in our business, and challenges with properly managing its use could result in reputational harm, competitive harm, and legal liability, and adversely affect our results of operations.
Risk Related to our International Operations
•International economic, political, legal, compliance, and business factors could negatively affect our financial statements.
•Trade relations between China and the United States could have a material adverse effect on our business and financial statements.
•Foreign currency exchange rates, including the volatility thereof, may adversely affect our financial statements.
Risk Related to Our Acquisitions, Investments, and Dispositions
•Our plans to separate into two independent, publicly traded companies may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits, including the anticipated tax treatment.
•Any inability to consummate acquisitions at our anticipated rate and at appropriate prices could negatively impact our growth rate and stock price.
•Our acquisition of businesses, joint ventures, and strategic relationships could negatively impact our financial statements.
•The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
•Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we have sold could adversely affect our financial statements.
•Potential indemnification liabilities to Vontier Corporation (“Vontier”) pursuant to the separation agreement could materially and adversely affect our businesses, financial condition, results of operations, and cash flows.
Risk Related to Regulatory and Compliance Matters
•Changes in industry standards and governmental regulations may reduce demand for our products or services or increase our expenses.
•Our reputation, ability to do business, and financial statements may be impaired by improper conduct by any of our employees, agents, or business partners.
•Our operations, products, and services expose us to the risk of environmental, health, and safety liabilities, costs, and violations that could adversely affect our reputation and financial statements.
•Our businesses are subject to extensive regulation, including healthcare regulations; existing or future failures to comply with those regulations could adversely affect our financial statements and reputation.
Risk Related to Our Tax and Accounting Matters
•Changes in our effective tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
•We could incur significant liability if our separation from Danaher, our separation of our Automation and Specialty business or our separation of Vontier (collectively, the “Separation Transactions”) are determined to be a taxable transaction.
•Changes in U.S. GAAP could adversely affect our reported financial results and may require significant changes to our internal accounting systems and processes.
•We may be required to recognize impairment charges for our goodwill and other intangible assets.
Risk Related to Our Financing Activities
•We have incurred a significant amount of debt, and our debt obligations, including the cost of such debt, will increase further if we incur additional debt and do not retire existing debt, our credit rating declines, or if the applicable interest rates rise.
See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for further discussion regarding reasons that actual results may differ materially from the results, developments, and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made (or such earlier date as may be specified in such statement). We do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
OVERVIEW
General
Fortive is a multinational business with global operations with approximately 46% of our sales derived from customers outside the United States in 2023. As a company with global operations, our businesses are affected by worldwide, regional, and industry-specific economic, regulatory, and political factors. Our geographic and industry diversity, as well as the range of products, software, and services we offer, typically help limit the impact of any one industry or the economy of any single country (except for the United States) on our operating results. Given the broad range of products manufactured, software and services provided, and geographies served, we do not use any indices other than general economic trends to predict the overall outlook for the Company. Our individual businesses monitor key competitors and customers, including their sales, to the extent possible, to gauge relative performance and the outlook for the future.
As a result of our geographic and industry diversity, we face a variety of opportunities and challenges, including technological development in most of the markets we serve, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force, and consolidation of our competitors. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which include Eastern Europe, the Middle East, Africa, Latin America, and Asia with the exception of Japan and Australia. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend, in particular, on our ability to expand our business across geographies and market segments, identify, consummate, and integrate appropriate acquisitions, develop innovative and differentiated new products, services, and software, expand and improve the effectiveness of our sales force, continue to reduce costs and improve operating efficiency and quality, attract relevant talent and retain, grow, and empower our talented workforce, and effectively address the demands of an increasingly regulated environment. We are making significant investments, organically and through acquisitions, to address technological change in the markets we serve and to improve our manufacturing, research and development, and customer-facing resources in order to be responsive to our customers throughout the world.
Segment Presentation
We operate and report our results in three segments, IOS, PT, and AHS, each of which is further described below.
In January 2024, we realigned Invetech from the AHS segment to the PT segment (the “Segment Realignment”) based on our strategic decision to divest the equipment design and manufacturing businesses of Invetech, while retaining the motion solution businesses (the “Motion Solution Business”) that are more closely aligned with the PT segment than the AHS segment. Prior period segment amounts below have been recast to conform to the revised segment presentation. In June 2024, we divested and transferred ownership of Invetech, excluding the Motion Solution Business, to its management team (the “Invetech Divestiture”). As a result of the divestiture, in the nine-month period ended September 27, 2024, we recorded a net realized loss of $25.6 million, which is identified as “Loss from divestiture” in the Consolidated Condensed Statements of Earnings. The divested businesses accounted for less than 1.0% of total revenue and less than 1.0% of total assets for the fiscal year ended December 31, 2023. The Invetech Divestiture did not represent a strategic shift with a major effect on the Company’s operations and financial results, and therefore the divested businesses are not reported as discontinued operations.
Our IOS segment provides advanced instrumentation, software and services to tens of thousands of customers enabling their mission-critical workflows. These offerings include electrical test & measurement, facility and asset lifecycle software applications, connected worker safety and compliance solutions across a range of vertical end markets, including manufacturing, process industries, healthcare, utilities and power, communications and electronics, among others. Typical users of these safety, productivity and sustainability solutions include electrical engineers, electricians, electronic technicians, EHS professionals, network technicians, facility managers, first-responders, and maintenance professionals.
Our PT segment helps solve tough technical challenges to speed breakthroughs in a wide range of applications, from food and beverage production and manufacturing to next-generation electric vehicles and clean energy, as our customers seek new test solutions to enable the electrification and connectivity of everything. Our expertise in materials, methods and measurements are reflected in our electrical test & measurement and sensing and material technologies offered to a broad set of customers and vertical end markets, including industrial, power and energy, automotive, medical equipment, food and beverage, aerospace and defense, semiconductor, and other general industries. Customers for these products and services include design engineers for advanced electronic devices and equipment, process and quality engineers focused on improved process capability and productivity, facility maintenance managers driving increased uptime, and other customers for whom precise measurement, reliability, and compliance are critical in their applications.
Our AHS segment supplies critical workflow solutions enabling healthcare providers to deliver exceptional patient care more efficiently. Our offerings include instrument sterilization solutions, instrument tracking, biomedical test tools, radiation
detection and safety monitoring, and end-to-end clinical productivity software and solutions. Our healthcare offerings help ensure critical safety standards are met, instruments and operating rooms are working at peak performance, and complex procedures are followed accurately in these mission-critical healthcare environments.
Non-GAAP Measures
In this report, references to sales from existing businesses (“core revenue”) refer to sales from operations calculated according to generally accepted accounting principles in the United States (“GAAP”) but excluding (1) the impact from acquired and divested businesses and (2) the impact of currency translation. 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 businesses or product lines that have been divested or, at the time of reporting, are pending divestiture but are not, and will not be, considered discontinued operations prior to the first anniversary of the divestiture. The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales impact from acquired businesses) and (b) the period-to-period change in sales (excluding sales impact from acquired businesses) after applying the current period foreign exchange rates to the prior year period. Sales from existing businesses should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies.
Management believes that reporting the non-GAAP financial measure of core revenue provides useful information to investors by helping identify underlying growth trends in our business and facilitating comparisons of our sales performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisition and 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 from core revenue because the impact of currency translation is not under management’s control and is subject to volatility. Management believes the exclusion of the effect of acquisitions and divestitures and currency translation may facilitate the assessment of underlying business trends and may assist in comparisons of long-term performance. References to sales volume from existing businesses refer to the impact of both price and unit sales.
Pending Separation Into Two Independent, Publicly Traded Companies
On September 4, 2024, we announced our intention to separate into two independent, publicly traded companies (the “Separation”). The Separation will create (i) a technology solutions company, retaining the Fortive name, with a portfolio of the brands currently operating under Fortive’s IOS and AHS business segments, focused on resilient, high-quality recurring growth by delivering productivity, safety, and reliability value to customers, and (ii) a global industrial company (“NewCo”) consisting of our brands currently operating under the PT segment with a focus on powerful secular growth trends by leveraging mission critical technologies in test and measurement, specialty sensors, and aerospace and defense subsystems. The Separation is expected to be structured in a tax-free manner for Fortive shareholders. The Company is targeting to complete the Separation by the fourth quarter of 2025, subject to the satisfaction of certain conditions, including, among others, final approval of Fortive’s Board of Directors, satisfactory completion of financing, receipt of a favorable opinion of legal counsel and/or a private letter ruling from the U.S. Internal Revenue Service with respect to the tax treatment of the transaction for U.S. federal income tax purposes, the effectiveness of a Form 10 registration statement filed with the SEC, and other regulatory approvals. All assets, liabilities, revenues and expenses of NewCo are included in the consolidated results of the Company in the accompanying consolidated condensed financial statements.
Acquisitions
On January 3, 2024, we acquired EA Elektro-Automatik Holding GmbH (“EA”), a leading supplier of high-power electronic test solutions for energy storage, mobility, hydrogen, and renewable energy applications. The acquisition of EA will bolster our innovative portfolio of products and services for engineers with complementary test and measurement solutions enabling the global energy transition. The total consideration paid was approximately $1.72 billion, net of acquired cash. We recorded approximately $1.17 billion of goodwill within the PT segment related to the EA acquisition, which is not tax deductible. We also anticipate future tax benefits as a result of the transaction.
Other Matters
We initiated a discrete restructuring plan in the first quarter of 2023 that was completed during the fourth quarter of 2023. The nature of these activities were broadly consistent throughout our segments and consisted primarily of targeted workforce reductions in response to overall macroeconomic and other external conditions. We incurred these costs to position ourselves to provide superior products and services to customers in a cost-efficient manner, while taking into consideration the impact of broad economic uncertainties. During the three and nine-month periods ended September 29, 2023, we incurred charges of $0.9 million and $29.2 million, respectively.
Business Performance and Outlook
Business Performance for the Period Ended September 27, 2024
During the three and nine-month periods ended September 27, 2024 (the “quarter” or the “third quarter” and “year-to-date period,” respectively), our sales increased by 2.7% and 2.9%, respectively.
The year-over-year increase in sales in the third quarter was primarily driven by a 1.1% increase in our core revenue and a 1.6% increase from acquisitions, net of divestitures. Core revenue growth in the third quarter included favorable pricing of 2.9%, partially offset by volume decline of 1.8%.
Year-over-year increases in the year-to-date period were consistent with those in the third quarter, and were driven by a 1.2% increase in our core revenue and a 2.3% increase from acquisitions, net of divestitures, partially offset by a decline of 0.6% due to unfavorable currency translation. Core revenue growth during the year-to-date period included favorable pricing of 2.6%, partially offset by volume decline of 1.4%.
Geographically, in the third quarter, year-over-year core revenue in developed markets increased slightly, driven by low single-digit growth in North America, partially offset by a low single-digit decline in Western Europe. Core revenue in high growth markets was up low single-digits year-over-year in the third quarter, driven by high-teens growth in Latin America, partially offset by a slight decline in Asia where China declined by high single-digits.
Geographically, in the year-to-date period, year-over-year core revenue in developed markets increased slightly, driven by a low single-digit growth in North America, partially offset by a slight decline in Western Europe. Core revenue in high growth markets increased year-over-year in the year-to-date period by low single-digits, driven by high-teens growth in Latin America, partially offset by a low single-digit decline in Asia where China declined by mid-single-digits.
Outlook
We anticipate revenue growth to be approximately 3% for the fourth quarter of 2024 and the full year. We anticipate core revenue growth to be approximately 1% for the fourth quarter and the full year.
We expect foreign exchange rates to remain volatile throughout the year, which could continue to impact our financial results. Additionally, our financial outlook is subject to various assumptions and risks, including but not limited to, ongoing geopolitical developments and events, including the U.S. presidential and other elections, macroeconomic conditions in the United States, China and other critical regions, impact from our pending separation into two independent publicly traded companies, and the the impact of inflationary dynamics on our expenses or our ability to realize price increases in our sales, interest rates, market conditions in key product segments, and elective surgery rates. We will continue to deploy FBS to actively manage these challenges and utilize pricing and other countermeasures to offset the aforementioned dynamics. We continue to monitor these conditions which may continue to impact our business, as well as potential adverse global economic trends and sentiments, monetary and fiscal policies, international trade and relations between the U.S., China and other nations, and investment and taxation policy initiatives being considered in the United States and by the Organization for Economic Co-operation and Development (“OECD”), including the potential impact of the Pillar Two initiative. In addition, we expect to execute a discrete restructuring plan related to the Separation beginning in the fourth quarter of 2024.
RESULTS OF OPERATIONS
Sales Growth
The following table summarizes total aggregate year-over-year sales growth and the components thereof for the third quarter as compared to the comparable period of 2023:
Components of Sales Growth | | | | | | | | | | | |
| % Change Three Months Ended September 27, 2024 vs. Comparable 2023 Period | | % Change Nine Months Ended September 27, 2024 vs. Comparable 2023 Period |
| Total revenue growth (GAAP) | 2.7 | % | | 2.9 | % |
Core (Non-GAAP) | 1.1 | % | | 1.2 | % |
| Acquisitions and divestitures (Non-GAAP) | 1.6 | % | | 2.3 | % |
| Currency exchange rates (Non-GAAP) | — | % | | (0.6) | % |
Operating Profit Margins
Operating profit margin was 19.3% for the third quarter, representing a decrease of 20 basis points as compared to 19.5% in the comparable period of 2023. Year-over-year changes in operating profit margin were comprised of the following:
•Year-over-year increase in price from existing businesses, volume gains in AHS, and gains from productivity measures, partially offset by a volume decline in certain businesses and end markets within our IOS and PT segments, and higher employee compensation — favorable 70 basis points
•The year-over-year effect of amortization from existing businesses and impairment of intangible assets incurred in 2023 — favorable 25 basis points
•The year-over-year net effect of acquisition and divestiture-related transaction costs incurred in the third quarter of 2024 — unfavorable 10 basis points
•The year-over-year net effect of acquired and divested businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 110 basis points
•The year-over-year effect of costs relating to the discrete restructuring plan initiated and completed in 2023 — favorable 5 basis points
Operating profit margin was 19.5% for the year-to-date period, yielding an increase of 110 basis points as compared to 18.4% in the comparable period of 2023. Year-over-year changes in operating profit margin were comprised of the following:
•Year-over-year increase in price from existing businesses, volume growth in IOS and AHS, and gains from productivity measures were partially offset by a volume decline in certain businesses and end markets within our PT segment, higher employee compensation and investment in growth initiatives. Additionally, there were unfavorable foreign exchange rates — favorable 80 basis points
•The year-over-year effect of amortization from existing businesses, and impairment of intangible assets incurred in 2023 — favorable 25 basis points
•The year-over-year net effect of acquisition and divestiture-related transaction costs incurred in the year-to-date period — unfavorable 70 basis points
•The year-over-year net effect of acquired and divested businesses, including amortization and acquisition-related fair value adjustments — unfavorable 130 basis points
•The year-over-year effect of costs relating to the discrete restructuring plan initiated and completed in 2023 — favorable 65 basis points
•The year-over-year effect of the gain on sale of land and certain office buildings in the PT segment in the first quarter of 2024 — favorable 140 basis points
Business Segments
Sales by business segment for each of the periods indicated were as follows ($ in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 27, 2024 | | September 29, 2023 | | September 27, 2024 | | September 29, 2023 |
| Intelligent Operating Solutions | $ | 661.2 | | | $ | 644.3 | | | $ | 2,003.9 | | | $ | 1,929.5 | |
| Precision Technologies | 550.9 | | | 552.5 | | | 1,661.7 | | | 1,653.9 | |
| Advanced Healthcare Solutions | 322.5 | | | 297.7 | | | 945.9 | | | 898.2 | |
| Total | $ | 1,534.6 | | | $ | 1,494.5 | | | $ | 4,611.5 | | | $ | 4,481.6 | |
INTELLIGENT OPERATING SOLUTIONS
Our IOS segment provides advanced instrumentation, software and services to tens of thousands of customers enabling their mission-critical workflows. These offerings include electrical test & measurement, facility and asset lifecycle software applications, connected worker safety and compliance solutions across a range of vertical end markets, including manufacturing, process industries, healthcare, utilities and power, communications and electronics, among others.
Intelligent Operating Solutions Selected Financial Data | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ($ in millions) | September 27, 2024 | | September 29, 2023 | | September 27, 2024 | | September 29, 2023 |
| Sales | $ | 661.2 | | | $ | 644.3 | | | $ | 2,003.9 | | | $ | 1,929.5 | |
| Operating profit | 167.7 | | | 156.8 | | | 505.0 | | | 452.0 | |
| Depreciation | 10.7 | | | 8.6 | | | 30.3 | | | 25.5 | |
| Amortization | 46.9 | | | 46.5 | | | 141.7 | | | 138.6 | |
| Operating profit as a % of sales | 25.4 | % | | 24.3 | % | | 25.2 | % | | 23.4 | % |
| Depreciation as a % of sales | 1.6 | % | | 1.3 | % | | 1.5 | % | | 1.3 | % |
| Amortization as a % of sales | 7.1 | % | | 7.2 | % | | 7.1 | % | | 7.2 | % |
Components of Sales Growth | | | | | | | | | | | |
| | % Change Three Months Ended September 27, 2024 vs. Comparable 2023 Period | | % Change Nine Months Ended September 27, 2024 vs. Comparable 2023 Period |
| Total revenue growth (GAAP) | 2.6 | % | | 3.9 | % |
Core (Non-GAAP) | 1.5 | % | | 3.1 | % |
| Acquisitions and divestiture (Non-GAAP) | 0.8 | % | | 1.1 | % |
| Currency exchange rates (Non-GAAP) | 0.3 | % | | (0.3) | % |
The sales growth in the third quarter and year-to-date period was driven primarily by favorable pricing across the segment and increased volume in our gas detection products, as well as software and service offerings, including software as a service (“SaaS”), partially offset by volume decline in test and measurement instrumentation. The acquisitions in 2023 also contributed 0.8% and 1.1% to revenue growth during the third quarter and year-to-date period, respectively.
Geographically, core revenue in developed markets increased in the third quarter by low single-digits, driven by a low single-digit growth in North America, partially offset by a low single-digit decline in Western Europe. Core revenue in high growth markets increased in the third quarter by low single-digits, driven by high-teens growth in Latin America, partially offset by a a mid-single-digit decline in China.
Geographically, core revenue in developed markets increased in the year-to-date period by low single-digits, driven by a low single-digit growth in North America and Western Europe. Core revenue in high growth markets in the year-to-date period increased by mid-single-digits, driven by high-teens growth in Latin America and a low single-digit growth in Asia.
Year-over-year price increases in our IOS segment contributed 2.6% to sales growth during both the third quarter and year-to-date period, and is reflected as a component of the change in core revenue.
Operating profit margin increased 110 basis points during the third quarter as compared to the comparable period of 2023. Year-over-year changes in operating profit margin were comprised of the following:
•Year-over-year increase in price from existing businesses, and higher sales volume from gas detection products, as well as software and service offerings, offset by decline in sales volume from test and measurement instrumentation, and higher employee compensation — favorable 35 basis points
•The year-over-year effect of amortization from existing businesses — favorable 30 basis points
•The year-over-year net effect of acquisition-related transaction costs incurred in the third quarter of 2023 — favorable 25 basis points
•The year-over-year net effect of acquired business, including amortization — relatively flat
•The year-over-year effect of costs relating to the discrete restructuring plan initiated and completed in 2023 — favorable 20 basis points
Operating profit margin increased 180 basis points during the year-to-date period, as compared to the comparable period of 2023. Year-over-year changes in operating profit margin comparisons were comprised of the following:
•Year-over-year increase from favorable pricing and higher sales volume from existing businesses, partially offset by higher employee compensation and customer acquisition and marketing costs to support growth initiatives — favorable 70 basis points
•The year-over-year effect of amortization from existing businesses, and impairment of intangible assets incurred in 2023 — favorable 45 basis points
•The year-over-year net effect of acquisition-related transaction costs incurred in the year-to-date period — relatively flat
•The year-over-year net effect of acquired business, including amortization, and acquisition-related fair value adjustments — unfavorable 25 basis points
•The year-over-year effect of costs relating to the discrete restructuring plan initiated and completed in 2023 — favorable 90 basis points
PRECISION TECHNOLOGIES
Our PT segment helps solve tough technical challenges to speed breakthroughs in a wide range of applications, from food and beverage production and manufacturing to next-generation electric vehicles and clean energy, as our customers seek new test solutions to enable the electrification and connectivity of everything. Our expertise in materials, methods and measurements are reflected in our electrical test & measurement and sensing and material technologies offered to a broad set of customers and vertical end markets, including industrial, power and energy, automotive, medical equipment, food and beverage, aerospace and defense, semiconductor, and other general industries.
Precision Technologies Selected Financial Data | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ($ in millions) | September 27, 2024 | | September 29, 2023 | | September 27, 2024 | | September 29, 2023 |
| Sales | $ | 550.9 | | | $ | 552.5 | | | $ | 1,661.7 | | | $ | 1,653.9 | |
| Operating profit | 122.0 | | | 140.9 | | | 386.4 | | | 401.3 | |
| Depreciation | 6.8 | | | 6.9 | | | 23.0 | | | 19.9 | |
| Amortization | 21.3 | | | 1.2 | | | 63.3 | | | 2.7 | |
| Operating profit as a % of sales | 22.1 | % | | 25.5 | % | | 23.3 | % | | 24.3 | % |
| Depreciation as a % of sales | 1.2 | % | | 1.2 | % | | 1.4 | % | | 1.2 | % |
| Amortization as a % of sales | 3.9 | % | | 0.2 | % | | 3.8 | % | | 0.2 | % |
Components of Sales Growth | | | | | | | | | | | |
| | % Change Three Months Ended September 27, 2024 vs. Comparable 2023 Period | | % Change Nine Months Ended September 27, 2024 vs. Comparable 2023 period |
| Total revenue growth (GAAP) | (0.3) | % | | 0.5 | % |
Core (Non-GAAP) | (3.7) | % | | (4.0) | % |
Acquisitions and divestiture (Non-GAAP) | 3.3 | % | | 5.0 | % |
| Currency exchange rates (Non-GAAP) | 0.1 | % | | (0.5) | % |
The sales results for both the third quarter and year-to-date periods were impacted by price increases across the segment and volume increases in energetic materials, offset by volume reductions in test and measurement and certain sensing technology products. The acquisition of EA, partially offset by the Invetech Divestiture, contributed 3.3% and 5.0% to revenue growth during the third quarter and year-to-date period, respectively.
Geographically, core revenue in developed markets decreased by mid-single-digits in the third quarter, driven by a mid-single-digit decline in North America and Western Europe. Core revenue in high growth markets increased by low single-digits in the third quarter, driven by low-twenties growth in Latin America, partially offset by a low single-digit decline in Asia.
Geographically, core revenue in developed markets decreased by mid-single-digits in the year-to-date period, driven by a low single-digit decline in North America, a high single-digit decline in Western Europe, and a low double-digit decline in Japan. Core revenue in high growth markets decreased by low single-digits in the year-to-date period, driven by a low double-digit growth in Latin America, offset by a mid-single-digit decline in Asia, where China decreased by low double-digits.
Year-over-year price increases in our PT segment contributed 2.9% and 2.2% to sales growth for the third quarter and year-to-date period, respectively, and is reflected as a component of the change in core revenue.
Operating profit margin decreased 340 basis points for the third quarter as compared to the comparable period of 2023. Year-over-year changes in operating profit margin were comprised of the following:
•Year-over-year increase in price from existing businesses and gains from productivity measures, offset by net volume reductions in the segment — favorable 5 basis points
•The year-over-year effect of amortization from existing businesses — favorable 5 basis points
•The year-over-year net effect of acquisition and divestiture-related transaction costs, which were incurred in the third quarter of 2024, primarily related to the EA acquisition — unfavorable 35 basis points
•The year-over-year net effect of acquired and divested businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 315 basis points
Operating profit margin decreased 100 basis points during the year-to-date period as compared to the comparable period of 2023. Year-over-year changes in operating profit margins were comprised of the following:
•Year-over-year increase in price from existing businesses and gains from productivity measures were offset by net volume reduction in the segment and unfavorable changes in foreign currency exchange rates — unfavorable 10 basis points
•The year-over-year effect of amortization from existing businesses — relatively flat
•The year-over-year net effect of acquisition and divestiture-related transaction costs incurred in the year-to-date period primarily related to the EA acquisition — unfavorable 180 basis points
•The year-over-year net effect of acquired and divested businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 325 basis points
•The year-over-year effect of costs relating to the discrete restructuring plan initiated and completed in 2023 — favorable 35 basis points
•The year-over-year effect of the gain on sale of land and certain office buildings in the first quarter of 2024 — favorable 380 basis points
ADVANCED HEALTHCARE SOLUTIONS
Our AHS segment supplies critical workflow solutions enabling healthcare providers to deliver exceptional patient care more efficiently. Our offerings include instrument sterilization solutions, instrument tracking, biomedical test tools, radiation detection and safety monitoring, and end-to-end clinical productivity software and solutions. Our healthcare offerings help ensure critical safety standards are met, instruments and operating rooms are working at peak performance, and complex procedures are followed accurately in these mission-critical healthcare environments.
Advanced Healthcare Solutions Financial Data | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ($ in millions) | September 27, 2024 | | September 29, 2023 | | September 27, 2024 | | September 29, 2023 |
| Sales | $ | 322.5 | | | $ | 297.7 | | | $ | 945.9 | | | $ | 898.2 | |
| Operating profit | 41.0 | | | 25.0 | | | 108.7 | | | 65.8 | |
| Depreciation | 4.8 | | | 5.2 | | | 15.0 | | | 15.3 | |
| Amortization | 45.1 | | | 45.3 | | | 135.4 | | | 135.9 | |
| Operating profit as a % of sales | 12.7 | % | | 8.4 | % | | 11.5 | % | | 7.3 | % |
| Depreciation as a % of sales | 1.5 | % | | 1.7 | % | | 1.6 | % | | 1.7 | % |
| Amortization as a % of sales | 14.0 | % | | 15.2 | % | | 14.3 | % | | 15.1 | % |
Components of Sales Growth | | | | | | | | | | | |
| | % Change Three Months Ended September 27, 2024 vs. Comparable 2023 period | | % Change Nine Months Ended September 27, 2024 vs. Comparable 2023 Period |
| Total revenue growth (GAAP) | 8.3 | % | | 5.3 | % |
Core (Non-GAAP) | 9.2 | % | | 6.6 | % |
| | |
| Currency exchange rates (Non-GAAP) | (0.9) | % | | (1.3) | % |
The sales results for both the third quarter and year-to-date period were driven by growth in our existing businesses due to price increases across the segment and volume increases in our sterilization and dosimetry products.
Geographically, core revenue in developed markets increased by low double-digits in the third quarter, driven by a low double-digit growth in North America and a high single-digit growth in Western Europe. In high growth markets, core revenue increased by mid-single-digits in the third quarter, driven by mid-teens growth in Latin America.
Geographically, core revenue in developed markets increased by mid-single-digits in the year-to-date period, driven by a mid-single-digit growth in North America and a high single-digit growth in Western Europe. Core revenue in high growth markets increased by high single-digits in the year-to-date period, driven by low-twenties growth in Latin America and a low single-digit growth in Asia.
Year-over-year price increases in our AHS segment contributed 3.6% and 3.3% to sales growth during the third quarter and year-to-date period, respectively, and is reflected as a component of the change in core revenue.
Operating profit margin increased 430 basis points during the third quarter, as compared to the comparable period of 2023. Year-over-year changes in operating profit margin were comprised of the following:
•Year-over-year increases due to favorable price and higher volume from existing businesses and gains from productivity measures, partially offset by higher employee compensation — favorable 310 basis points
•The year-over-year effect of amortization from existing businesses — favorable 120 basis points
Operating profit margin increased 420 basis points during the year-to-date period as compared to the comparable period of 2023. Year-over-year changes in operating profit margin were comprised of the following:
•Year-over-year increase due to favorable pricing and higher volume from existing businesses, and gains from productivity measures, partially offset by higher employee compensation, and unfavorable changes in foreign currency exchange rates — favorable 260 basis points
•The year-over-year effect of amortization from existing businesses — favorable 80 basis points
•The year-over-year effect of costs relating to the discrete restructuring plan initiated and completed in 2023 — favorable 80 basis points
COST OF SALES AND GROSS PROFIT | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| ($ in millions) | September 27, 2024 | | September 29, 2023 | | September 27, 2024 | | September 29, 2023 |
| Sales | $ | 1,534.6 | | | $ | 1,494.5 | | | $ | 4,611.5 | | | $ | 4,481.6 | |
| Cost of sales | (613.3) | | | (601.5) | | | (1,857.7) | | | (1,835.0) | |
| Gross profit | $ | 921.3 | | | $ | 893.0 | | | $ | 2,753.8 | | | $ | 2,646.6 | |
| Gross profit margin | 60.0 | % | | 59.8 | % | | 59.7 | % | | 59.1 | % |
The year-over-year increase in gross profit during the third quarter was primarily due to contributions from our acquired businesses, favorable pricing from existing businesses, increased volume from the AHS segment, gains from productivity measures and FBS initiatives, partially offset by net volume reductions in the IOS and PT segments, and higher employee compensation.
The year-over-year increase in gross profit during the year-to-date period was primarily due to contributions from our acquired businesses, favorable pricing from existing businesses, increased volume from the IOS and AHS segments, gains from productivity measures and FBS initiatives, partially offset by net volume reductions in the PT segment, higher employee compensation, and unfavorable changes in foreign currency exchange rates.
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
($ in millions) | September 27, 2024 | | September 29, 2023 | | September 27, 2024 | | September 29, 2023 |
| Sales | $ | 1,534.6 | | | $ | 1,494.5 | | | $ | 4,611.5 | | | $ | 4,481.6 | |
| Selling, general and administrative (“SG&A”) | 524.1 | | | 503.5 | | | 1,610.5 | | | 1,525.2 | |
| Research and development (“R&D”) | 101.7 | | | 98.4 | | | 306.9 | | | 298.6 | |
| SG&A as a % of sales | 34.2 | % | | 33.7 | % | | 34.9 | % | | 34.0 | % |
| R&D as a % of sales | 6.6 | % | | 6.6 | % | | 6.7 | % | | 6.7 | % |
The year-over-year increase in SG&A during the third quarter and year-to-date period was due to higher intangible amortization, incremental operating costs from recent acquisitions and higher employee compensation, partially offset by productivity measures. In addition, there were higher transaction expenses from our EA acquisition during the year-to-date period.
R&D, consisting principally of internal and contract engineering personnel costs, increased during the third quarter and year-to-date period, as compared to the comparable period of 2023 due to the incremental costs from our recent acquisitions and ongoing investments in innovation.
NON-OPERATING INCOME (EXPENSE), NET
Interest costs
Net interest expense for the third quarter and year-to-date period was $37.0 million and $119.7 million as compared to $29.8 million and $95.0 million in the comparable periods in 2023. The year-over-year increase in net interest expense was primarily due to higher overall debt balances. For discussion of our outstanding indebtedness, refer to Note 5 to the consolidated condensed financial statements.
Loss from divestiture
During the year-to-date period, we recognized a net realized loss of $25.6 million related to the Invetech Divestiture. For further discussion of this transaction, refer to Note 1 to the consolidated condensed financial statements.
Other non-operating expense, net
Other non-operating expense for the third quarter and year-to-date period was $26.3 million and $59.3 million, respectively, as compared to $4.2 million and $14.5 million, respectively, in the comparable period in 2023. The year-over-year increase as compared to the comparable periods in 2023 was due to a loss from our equity investments. The year-over-year increase during the year-to-date period also included a charitable contribution made in the first quarter of 2024. For further discussion of the charitable contribution and loss from equity investment, refer to Note 1 and Note 4 to the consolidated condensed financial statements, respectively.
INCOME TAXES
Our effective tax rates for the three and nine-month periods ended September 27, 2024 were 4.6% and 10.2%, respectively, as compared to 15.2% and 15.8%, respectively, for the three and nine-month periods ended September 29, 2023. The decrease in the effective tax rate for the three-month period ended September 27, 2024 as compared to the three-month period ended September 29, 2023 was primarily related to changes in applicable statutory tax rates, resulting in a benefit in the three-month period ended September 27, 2024. The decrease in the effective tax rate for the nine-month period ended September 27, 2024 as compared to the nine-month period ended September 29, 2023 was primarily related to cash repatriation resulting in a discrete tax credit, changes in applicable statutory tax rates, and changes in valuation allowances in the nine-month period ended September 27, 2024.
Our effective tax rates for the three and nine-month periods ended September 27, 2024, differ from the U.S. federal statutory rate of 21% due primarily to the impact of credits and deductions provided by law, including those associated with state income taxes, and changes in our uncertain tax position reserves.
The OECD has published the framework for a “Pillar Two” global minimum corporate income tax rate of fifteen percent (15%). For the current year, portions of Pillar Two are effective in certain countries where the Company conducts business, and the impact has been included within the provision for income taxes. The Company continues to monitor for further corporate tax legislative developments and changes to the Pillar Two framework.
COMPREHENSIVE INCOME
Comprehensive income increased by $139 million during the third quarter as compared to the comparable period in 2023 due to favorable changes in foreign currency translation of $135 million and an increase in net income.
Comprehensive income increased by $56 million during the year-to-date period as compared to the comparable period in 2023 due primarily to favorable changes in foreign currency translation adjustments of $32 million and an increase in net income.
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, which consist of available cash, our revolving credit facility, and access to commercial paper, bank loans, and capital markets, will be sufficient to allow us to continue funding and investing in our existing businesses, consummate strategic acquisitions, execute strategic separations, repurchase common stocks on the open market or in privately negotiated transactions, make interest and principal payments on our outstanding indebtedness, fulfill our contractual obligations, and manage our capital structure on a short and long-term basis.
We have generally satisfied any short-term liquidity needs that are not met through operating cash flows and available cash through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”).
Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on October 18, 2027 (the “Revolving Credit Facility”) which, to the extent not otherwise providing credit support for the commercial paper programs, can also be used for working capital and other general corporate purposes. As of September 27, 2024, no borrowings were outstanding under the Revolving Credit Facility.
The availability of the Revolving Credit Facility as a standby liquidity facility to repay maturing commercial paper is an important factor in maintaining the existing credit ratings of the Commercial Paper Programs when we have outstanding borrowings. We expect to limit any future borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, and repay any outstanding commercial paper as it matures.
On June 7, 2023, we filed with the SEC an “automatic shelf” registration statement (the “Shelf Registration Statement”). Under the Shelf Registration Statement, we may from time to time sell shares of common stock, preferred stock, debt securities, depositary shares, purchase contracts, purchase units, warrants and subscription rights in one or more offerings. For example, in February 2024, we completed our offering of €500 million aggregate principal amount of our 3.7% Euro-denominated senior unsecured notes due 2026 (the “2026 Notes”) and €700 million aggregate principal amount of our 3.7% Euro-denominated senior unsecured notes due 2029 (the “2029 Notes”) under the Shelf Registration Statement.
We continue to monitor the financial markets, the stability of U.S. and international banks and general global economic conditions. In addition, our access to the capital markets and other financing sources are impacted by any change in our credit rating. If changes in financial markets or other areas of the economy or downgrade in our credit rating adversely affect our access to the capital markets and other financing sources, we would expect to rely on a combination of available cash and existing available capacity under our credit facilities to provide short-term funding.
Overview of Cash Flows and Liquidity
Following is an overview of our cash flows and liquidity ($ in millions): | | | | | | | | | | | |
| | Nine Months Ended |
| September 27, 2024 | | September 29, 2023 |
| Net cash provided by operating activities | $ | 1,024.6 | | | $ | 906.8 | |
| | | |
| Cash paid for acquisitions, net of cash received | $ | (1,721.8) | | | $ | (57.7) | |
| Payments for additions to property, plant and equipment | (83.4) | | | (73.7) | |
| Proceeds from sale of property | 21.0 | | | 7.2 | |
| Cash infusion into divestiture | (14.0) | | | — | |
| All other investing activities | (1.6) | | | — | |
| Net cash used in investing activities | $ | (1,799.8) | | | $ | (124.2) | |
| | | |
| Net proceeds from (repayments of) commercial paper borrowings | $ | (571.2) | | | $ | (252.6) | |
| Proceeds from borrowings (maturities greater than 90 days), net of issuance costs | 1,733.5 | | | — | |
| Repayment of borrowings (maturities greater than 90 days) | (1,000.0) | | | (250.0) | |
| Repurchase of common shares | (423.0) | | | (207.9) | |
| Payment of dividends | (83.9) | | | (73.9) | |
| All other financing activities | 47.9 | | | 18.1 | |
Net cash used in financing activities | $ | (296.7) | | | $ | (766.3) | |
| | | |
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, interest, pension funding, and other items impact reported cash flows.
Operating cash flows were $1.02 billion during the year-to-date period, representing an increase of $118 million, or 13.0%, as compared to the comparable period of 2023. The year-over-year change in operating cash flows was primarily attributable to the following factors:
•Year-over-year increases of $76 million in Operating cash flows from net earnings, net of non-cash items (Amortization, Depreciation, Stock-based compensation, Gain on sale of property, Loss from divestiture, and Loss from equity investments).
•The aggregate changes in trade accounts receivable, inventories, and trade accounts payable generated $80 million of cash during the year-to-date period as compared to using $42 million in the comparable period of 2023. The amount of cash flow generated from or used by the aggregate of trade accounts receivable, inventories, and trade accounts payable depends upon how effectively we manage the cash conversion cycle, which generally represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers, and can be significantly impacted by the timing of collections and payments in a period.
•The aggregate changes in prepaid expenses, other assets, accrued expenses, and other liabilities used $171 million of cash in the year-to-date period as compared to using $91 million of cash in the comparable period of 2023. The year-over-year changes were driven by timing differences related to contract assets, contract liabilities, and payments of income taxes, interest, and prior year restructuring.
Investing Activities
Cash outflows from investing activities increased by $1.68 billion during the year-to-date period, as compared to the comparable period of 2023 with the increase primarily due to cash used for acquisitions, net of cash acquired, totaling $1.72 billion in 2024 and a year-over-year increase in capital expenditures of approximately $10 million, and the cash infusion into the Invetech Divestiture entity totaling $14 million, partially offset by the year-over-year increase in proceeds from sale of property of approximately $14 million.
Capital expenditures are made primarily for increasing production capacity, replacing aged equipment, supporting product development initiatives for hardware and software offerings, improving information technology systems, and purchasing
equipment that is used in revenue arrangements with customers. For the current year, we expect capital spending to be approximately $100-$120 million, although actual expenditures will ultimately depend on business conditions.
Financing Activities and Indebtedness
Cash flows from financing activities consist primarily of cash flows associated with the issuance and repayment of debt and commercial paper, payments of cash dividends to shareholders and share repurchases.
In the year-to-date period, financing activities used cash of $297 million, reflecting the following transactions:
•On January 2, 2024, we drew down an additional $450 million of the Delayed-Draw Term Loan due 2024 as part of the funding for the acquisition of EA.
•On February 13, 2024, we completed the sale of our registered offering of the 2026 Notes and the 2029 Notes, yielding net proceeds of approximately $1.3 billion.
•On February 13 2024, we repaid $1.0 billion in outstanding principal of the Delayed-Draw Term Loan due 2024, using net proceeds from the 2026 Notes and 2029 Notes.
•We repaid $571 million in net commercial paper repayments under the U.S. dollar-denominated commercial paper program.
•We repurchased 5.8 million shares of our common stock for approximately $423 million under our share repurchase program.
•We made dividend payments to common shareholders totaling $84 million.
In the comparable 2023 period, financing activities used cash of $766 million, reflecting the following transaction:
•On August 24, 2023, we repaid $250 million in outstanding principal of the Delayed-Draw Term Loan due 2023.
•We repaid $253 million in net commercial paper borrowings under the U.S. dollar-denominated commercial paper program.
•We repurchased 3 million shares of our common stock for approximately $208 million under our share repurchase program.
•We made dividend payments to common shareholders totaling $74 million.
Refer to Note 5 of the consolidated condensed financial statements for additional information regarding our financing activities and indebtedness.
Cash and Cash Requirements
As of September 27, 2024, we held approximately $811 million of cash and equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less, of which approximately 91% was held outside of the United States.
We have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our pension plans as required, pay dividends to shareholders, and support other business needs or objectives. 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 and repayment of maturing debt, we may also borrow under our commercial paper programs or credit facilities or enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under our commercial paper programs. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions.
Foreign cumulative earnings remain subject to foreign remittance taxes. We have made an election 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. 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.
As of September 27, 2024, we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future.
CRITICAL ACCOUNTING ESTIMATES
There were no material changes during the three and nine-month periods ended September 27, 2024 to the items we disclosed as our critical accounting estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2023 Annual Report on Form 10-K, except as noted below.
Acquisitions
Our business acquisitions, including EA, typically result in the recognition of goodwill, customer relationships, developed technology, and other intangible assets, which affect the amount of future period amortization expense and possible impairment charges that we may incur. The fair value of acquired intangible assets are determined using information available near the acquisition date based on estimates and assumptions that are deemed reasonable by us. Significant assumptions include the discount rates and certain assumptions that form the basis of the forecasted cash flows of the acquired business including earnings before interest, taxes, depreciation and amortization (“EBITDA”), revenue, revenue growth rates, royalty rates, customer attrition rates, and technology obsolescence rates. These assumptions are forward looking and could be affected by future economic and market conditions. We engage third-party valuation specialists who review our critical assumptions and calculations of the fair value of acquired intangible assets in connection with material acquisitions. In connection with the EA acquisition in the first quarter of 2024, we recorded approximately $1.17 billion of goodwill and approximately $681 million of intangible assets. Refer to Note 2 for additional information of the EA acquisition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our concentrations of credit risk arising from trade receivables is limited due to the diversity of our customers. Our businesses perform credit evaluations of their customers’ financial conditions as appropriate and also obtain collateral or other security when appropriate.
Additional quantitative and qualitative disclosures about market risk appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Instruments and Risk Management,” in our 2023 Annual Report on Form 10-K. There were no material changes during the three and nine-month periods ended September 27, 2024 to the information reported in our 2023 Annual Report on Form 10-K relating to our evaluation of interest rate, foreign currency exchange, and commodity price risk. Refer to Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussion around the impact of these items in the third quarter and year-to-date period.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of the President and Chief Executive Officer, and the Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the President and Chief Executive Officer, and the Senior Vice President and Chief Financial Officer, have concluded that, as of the end of such period, these disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Information Relating to Forward-Looking Statements,” in Part I - Item 2 of this Form 10-Q and in the “Risk Factors” section of our 2023 Annual Report on Form 10-K. Other than as provided below, there were no material changes during the quarter ended September 27, 2024 to the risk factors reported in the “Risk Factors” section of our 2023 Annual Report on Form 10-K.
Our plans to separate into two independent, publicly traded companies may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits, including the anticipated tax treatment.
On September 4, 2024, we announced our intention to separate into two independent, publicly traded companies (the “Separation”). The Separation, if effectuated, will create (i) a technology solutions company, retaining the Fortive name, with a
portfolio of the brands currently operating under Fortive’s IOS and AHS business segments, focused on resilient, high-quality recurring growth by delivering productivity, safety, and reliability value to customers, and (ii) a global industrial company (“NewCo”) consisting of our brands currently operating under the PT segment with a focus on powerful secular growth trends by leveraging mission critical technologies in test and measurement, specialty sensors, and aerospace and defense subsystems. The Separation is expected to be structured in a tax-free manner for Fortive shareholders. The Company is targeting to complete the Separation by the fourth quarter of 2025, subject to the satisfaction of certain conditions, including, among others, final approval of Fortive’s Board of Directors, satisfactory completion of financing, receipt of a favorable opinion of legal counsel and/or a private letter ruling from the U.S. Internal Revenue Service with respect to the tax treatment of the transaction for U.S. federal income tax purposes, the effectiveness of a Form 10 registration statement filed with the SEC, and other regulatory approvals.
Our ability to effectuate the Separation, the structure of the Separation, and the anticipated benefits of the Separation may be adversely and materially impacted by adverse market conditions, possible delays in obtaining various tax rulings, regulatory approvals or clearances or otherwise satisfying the required conditions of the Separation, costs or inefficiencies associated with dis-synergies related to the Separation, uncertainty of the financial markets, our business performance, and unanticipated delays in establishing infrastructure or processes for NewCo. In addition, the costs and resources required to effectuate the Separation may be significantly higher than what we currently anticipate.
Executing the Separation will also require significant time and attention from management, which could distract them from other tasks in operating our business and result in performance shortfalls. The pendency of the Separation could negatively impact the market price of our common stock, and even if the Separation is completed, we cannot assure you that the Separation will yield greater benefits to the Company and its shareholders than if the Separation had not occurred. Following the Separation, the combined value of the common stock of the two publicly-traded companies may not be equal to or greater than what the value of our common stock would have been had the Separation not occurred. In addition, if the Separation is ultimately not consummated, the Company will have incurred costs, which may be significant, without realizing the anticipated benefits.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On February 17, 2022, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to 20 million shares of the Company’s outstanding common stock from time to time on the open market or in privately negotiated transactions. On January 23, 2024, the Company’s Board of Directors increased the number of shares authorized under the share repurchase program by an additional 11 million shares, with 14.2 million shares remaining authorized under the share repurchase program as of September 27, 2024. There is no expiration date for the repurchase program, and the timing and amount of repurchases under the program are determined by the Company’s management based on market conditions and other factors. The repurchase program may be suspended or discontinued at any time by the Board of Directors. During the fiscal quarter ended September 27, 2024, the Company purchased 3.8 million shares of its common stock at an average share price of $70.87.
The following table provides details about our share repurchases during the fiscal quarter ended September 27, 2024.
| | | | | | | | | | | | | | | | | | | | | | | |
| Period | Total number of shares (or units) purchased | | Average price paid per share (or unit) | | Total number
of shares (or units)
purchased
as part of publicly
announced plans or
programs | | Maximum number
(or approximate dollar
value) of shares
(or units) that may yet be
purchased under the
plans or programs |
June 29 - July 28 | — | | | $ | — | | | N/A | | N/A |
July 29 - August 28 | 2,100,000 | | | 70.08 | | | 2,100,000 | | | 15,900,000 | |
August 28 - September 27 | 1,709,857 | | | 71.83 | | | 1,709,857 | | | 14,190,143 | |
| Total | 3,809,857 | | | $ | 70.87 | | | 3,809,857 | | | 14,190,143 | |
| | | | | | | |
ITEM 5. OTHER INFORMATION
(c) Trading Plans
During the third quarter ended September 27, 2024, no directors or Section 16 officers modified, or any “Rule 10b5-1 trading arrangement” or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS | | | | | | | | |
| | |
Exhibit
Number | | Description |
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 10.1 | | |
| | |
| 10.2 | | |
| | |
| 31.1 | | |
| |
| 31.2 | | |
| |
| 32.1 | | |
| |
| 32.2 | | |
| |
| 101.INS | | XBRL Instance Document (1) - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
| |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document (1) |
| |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document (1) |
| |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document (1) |
| |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document (1) |
| |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document (1) |
| | |
| 104 | | The cover page from this Quarterly Report on Form 10-Q for the quarter ended September 27, 2024, formatted in Inline XBRL and contained in Exhibit 101. |
* Indicates management contract or compensatory plan, contract or arrangement.
(1) Filed electronically herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | | | | | |
| FORTIVE CORPORATION: |
| | |
| Date: October 30, 2024 | By: | /s/ Charles E. McLaughlin |
| | Charles E. McLaughlin |
| | Senior Vice President and Chief Financial Officer |
| | |
| Date: October 30, 2024 | By: | /s/ Christopher M. Mulhall |
| | Christopher M. Mulhall |
| | Chief Accounting Officer |
| | |
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