Fortive Corp - FORM 10-Q - July 26, 2018

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EX-32.2 - EXHIBIT 32.2 - Fortive Corpa20180629-ex322.htm
EX-32.1 - EXHIBIT 32.1 - Fortive Corpa20180629-ex321.htm
EX-31.2 - EXHIBIT 31.2 - Fortive Corpa20180629-ex312.htm
EX-31.1 - EXHIBIT 31.1 - Fortive Corpa20180629-ex311.htm
EX-12.1 - EXHIBIT 12.1 - Fortive Corpa20180629-ex121.htm

 
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
 ________________________________________________
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended: June 29, 2018
Or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            
Commission file number 1-37654
 ________________________________________________
Fortive Corporation
(Exact name of registrant as specified in its charter)
________________________________________________ 
 
Delaware
 
47-5654583
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification number)
 
 
 
6920 Seaway Blvd
Everett, WA
 
98203
(Address of principal executive offices)
 
(Zip code)
Registrant’s telephone number, including area code: (425) 446-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     x
 
 
 
Accelerated filer    ¨
 
 
 
 
 
Non-accelerated filer      ¨
 
(Do not check if a smaller reporting company)
 
Smaller reporting company      ¨
 
 
 
 
 
 
 
 
 
Emerging growth company      ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý
The number of shares of common stock outstanding at July 19, 2018 was 349,152,355.
 


FORTIVE CORPORATION
INDEX
FORM 10-Q
 



PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
($ in millions, except per share amounts)
 
As of
 
June 29, 2018
 
December 31, 2017
 
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and equivalents
$
2,368.2

 
$
962.1

Accounts receivable, net
1,187.8

 
1,143.6

Inventories:
 
 
 
Finished goods
223.2

 
217.2

Work in process
107.9

 
78.9

Raw materials
311.2

 
284.5

Total inventories
642.3

 
580.6

Prepaid expenses and other current assets
305.1

 
250.5

Total current assets
4,503.4

 
2,936.8

Property, plant and equipment, net of accumulated depreciation of $1,114.9 and $1,086.8 at June 29, 2018 and December 31, 2017, respectively
690.4

 
712.5

Other assets
479.5

 
476.8

Goodwill
5,081.9

 
5,098.5

Other intangible assets, net
1,230.9

 
1,276.0

Total assets
$
11,986.1

 
$
10,500.6

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
799.3

 
$
—

Trade accounts payable
763.5

 
727.5

Accrued expenses and other current liabilities
735.9

 
874.8

Total current liabilities
2,298.7

 
1,602.3

Other long-term liabilities
1,118.1

 
1,033.9

Long-term debt
2,927.4

 
4,056.2

Equity:
 
 
 
5.0% Mandatory convertible preferred stock, series A: $0.01 par value, 15.0 million shares authorized; 1.4 million shares issued and outstanding at June 29, 2018; no shares issued or outstanding at December 31, 2017
—

 
—

Common stock: $0.01 par value, 2.0 billion shares authorized; 349.5 and 348.2 million issued; 349.0 and 347.8 million outstanding at June 29, 2018 and December 31, 2017, respectively
3.5

 
3.5

Additional paid-in capital
3,836.8

 
2,444.1

Retained earnings
1,853.9

 
1,350.3

Accumulated other comprehensive income (loss)
(69.6
)
 
(7.6
)
Total Fortive stockholders’ equity
5,624.6

 
3,790.3

Noncontrolling interests
17.3

 
17.9

Total stockholders’ equity
5,641.9

 
3,808.2

Total liabilities and equity
$
11,986.1

 
$
10,500.6

See the accompanying Notes to the Consolidated Condensed Financial Statements.

3

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
($ and shares in millions, except per share amounts)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Sales
$
1,856.0

 
$
1,628.8

 
$
3,596.7

 
$
3,164.0

Cost of sales
(917.1
)
 
(823.7
)
 
(1,787.0
)
 
(1,614.9
)
Gross profit
938.9

 
805.1

 
1,809.7

 
1,549.1

Operating costs:
 
 
 
 
 
 
 
Selling, general and administrative expenses
(445.5
)
 
(356.9
)
 
(869.2
)
 
(709.1
)
Research and development expenses
(111.0
)
 
(99.1
)
 
(219.9
)
 
(195.3
)
Operating profit
382.4

 
349.1

 
720.6

 
644.7

Non-operating expenses:
 
 
 
 
 
 
 
Interest expense, net
(25.3
)
 
(22.7
)
 
(49.9
)
 
(45.3
)
Other non-operating expenses
(1.1
)
 
(0.8
)
 
(1.8
)
 
(1.5
)
Earnings before income taxes
356.0

 
325.6

 
668.9

 
597.9

Income taxes
(61.0
)
 
(85.5
)
 
(112.7
)
 
(158.1
)
Net earnings
295.0

 
240.1

 
556.2

 
439.8

Mandatory convertible preferred stock cumulative dividends
(0.2
)
 
—

 
(0.2
)
 
—

Net earnings attributable to common stockholders
$
294.8

 
$
240.1

 
$
556.0

 
$
439.8

Net earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.84

 
$
0.69

 
$
1.59

 
$
1.27

Diluted
$
0.83

 
$
0.68

 
$
1.57

 
$
1.25

Average common stock and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
349.2

 
347.2

 
348.9

 
347.1

Diluted
355.0

 
352.2

 
354.7

 
351.8

See the accompanying Notes to the Consolidated Condensed Financial Statements.


4

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
(unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Net earnings
$
295.0

 
$
240.1

 
$
556.2

 
$
439.8

Other comprehensive income, net of income taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(99.8
)
 
45.2

 
(63.4
)
 
88.8

Pension adjustments
0.7

 
0.9

 
1.4

 
1.7

Total other comprehensive income, net of income taxes
(99.1
)
 
46.1

 
(62.0
)
 
90.5

Comprehensive income
$
195.9

 
$
286.2

 
$
494.2

 
$
530.3

See the accompanying Notes to the Consolidated Condensed Financial Statements.


5

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CHANGES IN EQUITY
($ and shares in millions)
(unaudited)
 
 
Common Stock
 
Preferred Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Noncontrolling
Interests
 
Shares
 
Amount
Shares
 
Amount
 
Balance, December 31, 2017
347.8

 
$
3.5

 
—

 
$
—

 
$
2,444.1

 
$
1,350.3

 
$
(7.6
)
 
$
17.9

Adoption of accounting standards
—

 
—

 
—

 
—

 
—

 
(3.9
)
 
—

 
—

Balance, January 1, 2018
347.8

 
3.5

 
—

 
—

 
2,444.1

 
1,346.4

 
(7.6
)
 
17.9

Net earnings for the period
—

 
—

 
—

 
—

 
—

 
556.2

 
—

 
—

Dividends to shareholders
—

 
—

 
—

 
—

 
—

 
(48.7
)
 
—

 
—

Separation related adjustments
—

 
—

 
—

 
—

 
10.9

 
—

 
—

 
—

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
(62.0
)
 
—

Common stock-based award activity
1.2

 
—

 
—

 
—

 
44.8

 
—

 
—

 
—

Issuance of mandatory convertible preferred stock
—

 
—

 
1.4

 
—

 
1,337.0

 
—

 
—

 
—

Change in noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(0.6
)
Balance, June 29, 2018
349.0

 
$
3.5

 
1.4

 
$
—

 
$
3,836.8

 
$
1,853.9

 
$
(69.6
)
 
$
17.3

See the accompanying Notes to the Consolidated Condensed Financial Statements.


6

FORTIVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited)
 
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
Cash flows from operating activities:
 
 
 
Net earnings
$
556.2

 
$
439.8

Noncash items:
 
 
 
Depreciation
69.1

 
47.2

Amortization
49.1

 
26.6

Stock-based compensation expense
26.5

 
25.3

Change in accounts receivable, net
(54.0
)
 
(20.7
)
Change in inventories
(68.4
)
 
(7.9
)
Change in trade accounts payable
41.0

 
(28.8
)
Change in prepaid expenses and other assets
(42.0
)
 
(8.3
)
Change in accrued expenses and other liabilities
(64.7
)
 
(79.2
)
Net cash provided by operating activities
512.8

 
394.0

Cash flows from investing activities:
 
 
 
Cash paid for acquisitions
(9.3
)
 
—

Payments for additions to property, plant and equipment
(58.7
)
 
(55.6
)
All other investing activities
3.9

 
(3.0
)
Net cash used in investing activities
(64.1
)
 
(58.6
)
Cash flows from financing activities:
 
 
 
Net repayments of borrowings (maturities of 90 days or less)
(326.0
)
 
(158.8
)
Proceeds from issuance of mandatory convertible preferred stock net of $36 million of issuance costs
1,338.2

 
—

Payment of dividends
(48.7
)
 
(48.6
)
All other financing activities
15.3

 
7.3

Net cash provided (used) by financing activities
978.8

 
(200.1
)
Effect of exchange rate changes on cash and equivalents
(21.4
)
 
29.9

Net change in cash and equivalents
1,406.1

 
165.2

Beginning balance of cash and equivalents
962.1

 
803.2

Ending balance of cash and equivalents
$
2,368.2

 
$
968.4

See the accompanying Notes to the Consolidated Condensed Financial Statements.


7

FORTIVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1. BUSINESS OVERVIEW
Fortive Corporation (“Fortive”, the “Company,” “we,” “us,” or “our”) is a diversified industrial growth company encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation and solutions, transportation technology, sensing, automation and specialty, and franchise distribution markets. Our businesses design, develop, service, manufacture and market professional and engineered products, software and services for a variety of end markets, building upon leading brand names, innovative technology and significant market positions.
We prepared the unaudited consolidated condensed financial statements included herein in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) applicable for interim periods. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations; however, we believe the disclosures are adequate to make the information presented not misleading. The consolidated condensed financial statements included herein should be read in conjunction with the audited annual consolidated financial statements as of and for the year ended December 31, 2017 and the footnotes (“Notes”) thereto included within our 2017 Annual Report on Form 10-K.
In our opinion, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present our financial position as of June 29, 2018 and December 31, 2017, and our results of operations and cash flows for the three and six months ended June 29, 2018 and June 30, 2017. Reclassification of certain prior year amounts have been made to conform to current year presentation.
Accumulated Other Comprehensive Income (Loss)—Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. The changes in accumulated other comprehensive income (loss) by component are summarized below ($ in millions):
 
Foreign
currency
translation
adjustments
 
Pension
adjustments
 
Total
For the Three Months Ended June 29, 2018:
 
 
 
 
 
Balance, March 30, 2018
$
100.4

 
$
(70.9
)
 
$
29.5

Other comprehensive income (loss) before reclassifications, net of income taxes
(99.8
)
 
—

 
(99.8
)
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase (decrease)
—

 
0.9

(a) 
0.9

Income tax impact
—

 
(0.2
)
 
(0.2
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
0.7

 
0.7

Net current period other comprehensive income (loss), net of income taxes
(99.8
)
 
0.7

 
(99.1
)
Balance, June 29, 2018
$
0.6

 
$
(70.2
)
 
$
(69.6
)
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details).

8

 
Foreign
currency
translation
adjustments
 
Pension
adjustments
 
Total
For the Three Months Ended June 30, 2017:
 
 
 
 
 
Balance, March 31, 2017
$
(29.0
)
 
$
(72.4
)
 
$
(101.4
)
Other comprehensive income (loss) before reclassifications, net of income taxes
45.2

 
—

 
45.2

Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase (decrease)
—

 
1.1

(a) 
1.1

Income tax impact
—

 
(0.2
)
 
(0.2
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
0.9

 
0.9

Net current period other comprehensive income (loss), net of income taxes
45.2

 
0.9

 
46.1

Balance, June 30, 2017
$
16.2

 
$
(71.5
)
 
$
(55.3
)
 
 
 
 
 
 
For the Six Months Ended June 29, 2018:
 
 
 
 
 
Balance, December 31, 2017
$
64.0

 
$
(71.6
)
 
$
(7.6
)
Other comprehensive income (loss) before reclassifications, net of income taxes
(63.4
)
 
—

 
(63.4
)
Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase (decrease)
—

 
1.8

(a) 
1.8

Income tax impact
—

 
(0.4
)
 
(0.4
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
1.4

 
1.4

Net current period other comprehensive income (loss)
(63.4
)
 
1.4

 
(62.0
)
Balance, June 29, 2018
$
0.6

 
$
(70.2
)
 
$
(69.6
)
 
 
 
 
 
 
For the Six Months Ended June 30, 2017:
 
 
 
 
 
Balance, December 31, 2016
$
(72.6
)
 
$
(73.2
)
 
$
(145.8
)
Other comprehensive income (loss) before reclassifications, net of income taxes
88.8

 
—

 
88.8

Amounts reclassified from accumulated other comprehensive income (loss):
 
 
 
 
 
Increase (decrease)
—

 
2.2

(a) 
2.2

Income tax impact
—

 
(0.5
)
 
(0.5
)
Amounts reclassified from accumulated other comprehensive income (loss), net of income taxes
—

 
1.7

 
1.7

Net current period other comprehensive income (loss)
88.8

 
1.7

 
90.5

Balance, June 30, 2017
$
16.2

 
$
(71.5
)
 
$
(55.3
)
 
 
 
 
 
 
(a) This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (refer to Note 7 for additional details).
Recently Issued Accounting Standards—In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. This standard is effective for us beginning January 1, 2020, with early adoption permitted. We are currently evaluating the impact of this standard on our financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will require, among other items, lessees to recognize a right-of-use asset and a lease liability for most leases. The standard also requires lessees and lessors to disclose the amount, timing and uncertainty of cash flows arising from leases. The accounting applied by a lessor is largely unchanged from the current standard. This standard is effective for us beginning January 1, 2019 (with early adoption permitted) using a modified retrospective transition approach and provides for certain practical expedients. In September 2017, the FASB issued

9

ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which provided additional implementation guidance on the previously issued ASU. We are in the process of assessing the impact of the standard and designing related internal control procedures. Based on our efforts to date, we expect the recognition of the right-of-use asset and lease liability for our real estate and equipment leases will have a material impact on the Consolidated Balance Sheets. We do not expect this standard to have a material impact on our future Consolidated Statements of Earnings. 
NOTE 2. ACQUISITIONS AND DIVESTITURES
For a description of our material acquisition activity, refer to Note 3 of our 2017 Annual Report on Form 10-K.
We continually evaluate potential acquisitions and divestitures that align with our portfolio strategy and expedite the evolution of our portfolio into new and attractive business areas. We have completed a number of acquisitions that have been accounted for as purchases and have resulted in the recognition of goodwill in our financial statements. This goodwill arises because the purchase price for each business reflects a number of factors including the future earnings and cash flow potential of the business, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which we acquired the business, the avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance our existing offerings to key target markets and develop new and profitable businesses, and the complementary strategic fit and resulting synergies the business brings to existing operations.
We make an initial allocation of the purchase price at the date of acquisition based on our understanding of the fair value of the acquired assets and assumed liabilities. We obtain this information during due diligence and through other sources. In the months after closing, as we obtain additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and learn more about the newly acquired business, we are able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. We are in the process of obtaining valuations of certain acquired assets and evaluating the tax impact in connection with certain acquisitions. We make appropriate adjustments to purchase price allocations prior to completion of the applicable measurement period, as required.
Pending Acquisitions
Advanced Sterilization Products
On June 6, 2018, we made a binding offer to Ethicon, Inc., a subsidiary of Johnson & Johnson, to purchase its Advanced Sterilization Products (“ASP”) business for approximately $2.7 billion in cash. The transaction is expected to close no later than early 2019 and is subject to customary closing conditions, including regulatory approvals.
ASP is a leading global provider of innovative sterilization and disinfection solutions and pioneered low-temperature hydrogen peroxide sterilization technology. ASP’s products, which are sold globally, include the STERRAD system for sterilizing instruments and the EVOTECH and ENDOCLENS systems for endoscope reprocessing and cleaning.
Gordian
On July 2, 2018, we entered into a definitive agreement to acquire TGG Ultimate Holdings, Inc. and its subsidiaries, including The Gordian Group, Inc. (“Gordian”), a privately-held, leading provider of construction cost data, software and service. The purchase price for the acquisition is $775 million and the transaction is expected to close in the third quarter of 2018. The acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to be financed with available cash.
Gordian’s comprehensive offerings serve the entire building lifecycle and provide workflow solutions to optimize every stage of an asset owner’s construction and maintenance needs, including connecting the owner and contractors in the same exchange and providing access to cost and facilities metrics databases via a subscription-based model.

10

Planned Divestiture of A&S Business
On March 7, 2018, we entered into a definitive agreement to combine four of our operating companies from our Automation & Specialty platform (the “A&S Business”) with Altra Industrial Motion Corp (“Altra”) in a tax-efficient Reverse Morris Trust transaction. In the transaction, we will receive approximately $1.4 billion in cash and debt retirement, and our shareholders will receive in the aggregate 35 million shares of Altra, representing approximately 54% of outstanding shares of Altra common stock immediately following the transaction. The A&S Business includes the market-leading brands of Kollmorgen, Thomson, Portescap and Jacobs Vehicle Systems, and generated approximately $907 million in revenue for the year ended December 31, 2017. The transaction is expected to close by the end of 2018, subject to customary closing conditions, including receipt of certain regulatory approvals, Altra shareholder approval, and our receipt of confirmation of the tax treatment of certain matters. Upon closing of the transaction, we will classify the historical results of the A&S Business as discontinued operations in our financial statements.
NOTE 3. GOODWILL
The following is a rollforward of our goodwill ($ in millions):
Balance, December 31, 2017
$
5,098.5

Attributable to 2018 acquisitions
1.8

Foreign currency translation & other
(18.4
)
Balance, June 29, 2018
$
5,081.9

The carrying value of goodwill by segment is summarized as follows ($ in millions):
 
June 29, 2018
 
December 31, 2017
Professional Instrumentation
$
3,321.1

 
$
3,331.0

Industrial Technologies
1,760.8

 
1,767.5

Total goodwill
$
5,081.9

 
$
5,098.5

We have not identified any “triggering” events which would have indicated a potential impairment of goodwill in the six months ended June 29, 2018.
NOTE 4. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where our assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:
•
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
•
Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation.
•
Level 3 inputs are unobservable inputs based on our assumptions. The classification of a financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Below is a summary of financial liabilities that are measured at fair value on a recurring basis ($ in millions):
 
Quoted Prices
in Active
Market
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
June 29, 2018
 
 
 
 
 
 
 
Deferred compensation liabilities
$
—

 
$
21.7

 
$
—

 
$
21.7

December 31, 2017
 
 
 
Deferred compensation liabilities
$
—

 
$
20.9

 
$
—

 
$
20.9


11

Certain management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and benefits accrual included in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of Fortive common stock). Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates.
Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments are as follows ($ in millions):
 
June 29, 2018
 
December 31, 2017
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Current portion of long-term debt
$
799.3

 
$
796.4

 
$
—

 
$
—

Long-term debt, net of current maturities
$
2,927.4

 
$
2,823.9

 
$
4,056.2

 
$
4,051.8

As of June 29, 2018 and December 31, 2017, the current portion of long-term debt and long-term debt, net of current maturities were categorized as Level 1.
The fair values of the current portion of long-term debt and long-term debt were based on quoted market prices. The difference between the fair value and the carrying amounts of long-term borrowings may be attributable to changes in market interest rates and/or our credit ratings subsequent to the incurrence of the borrowing. The fair value of cash and cash equivalents, accounts receivable, net and trade accounts payable approximates their carrying amount due to the short-term maturities of these instruments.
NOTE 5. FINANCING AND CAPITAL
Financing
The carrying value of the components of our long-term debt were as follows ($ in millions):
 
June 29, 2018
 
December 31, 2017
U.S. dollar-denominated commercial paper
$
339.8

 
$
665.1

Euro-denominated commercial paper
275.2

 
282.7

U.S. dollar variable interest rate term loan due 2019
500.0

 
500.0

Yen variable interest rate term loan due 2022
124.5

 
122.4

1.80% senior unsecured notes due 2019
299.3

 
298.9

2.35% senior unsecured notes due 2021
746.5

 
745.9

3.15% senior unsecured notes due 2026
891.5

 
891.0

4.30% senior unsecured notes due 2046
546.8

 
546.8

Other long-term debt
3.1

 
3.4

Long-term debt
3,726.7

 
4,056.2

Less: current portion of long-term debt
799.3

 
—

Long-term debt, net of current maturities
$
2,927.4

 
$
4,056.2

Unamortized debt discounts, premiums and issuance costs of $16.1 million and $18.2 million as of June 29, 2018 and December 31, 2017, respectively, are netted against the aggregate principal amounts of the components of debt table above. Refer to Note 9 of our 2017 Annual Report on Form 10-K for further details of our debt financing.
We generally satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”). Credit support for the Commercial Paper Programs is provided by a five-year $1.5 billion senior unsecured revolving credit facility that expires on June 16, 2021 (the “Revolving Credit Facility”) which can also be used for working capital and other general corporate purposes. As of June 29, 2018, no borrowings were outstanding under the Revolving Credit Facility.

12

The details of our Commercial Paper Programs as of June 29, 2018 are as follows ($ in millions):
 
Carrying value
 
Annual effective rate
 
Weighted average remaining maturity (in days)
U.S. dollar-denominated commercial paper
$
339.8

 
2.39
 %
 
9
Euro-denominated commercial paper
$
275.2

 
(0.10
)%
 
76
We classified our borrowings outstanding under the Commercial Paper Programs as long-term debt in the accompanying Consolidated Condensed Balance Sheets as we had the intent and ability, as supported by availability under the Revolving Credit Facility referenced above, to refinance these borrowings for at least one year from the balance sheet date.
As of June 29, 2018, we were in compliance with all of our covenants.
Capital
On June 29, 2018, we issued 1,380,000 shares of 5.0% Mandatory Convertible Preferred Stock, Series A (“MCPS”) with a par value of $0.01 per share and liquidation preference of $1,000 per share, which included the exercise of an over-allotment option in full to purchase 180,000 shares. We received $1.34 billion in proceeds from the issuance of the MCPS, net of $36 million of issuance costs. We will use the net proceeds from the issuance of MCPS to fund our acquisition activities and for general corporate purposes, including repayment of debt, working capital and capital expenditures. We expect to pay up to an additional $1.5 million in issuance costs in the third quarter of 2018.
Each outstanding share of MCPS will convert automatically on July 1, 2021 (“the mandatory conversion date”) into between 10.8554 and 13.2979 common shares, subject to anti-dilution adjustments. The number of shares of our common stock issuable on conversion will be determined based on the average volume weighted average price per share of our common stock over the 20 consecutive trading day period preceding the mandatory conversion date. At any time prior to July 1, 2021, holders may elect to convert each share of the MCPS into shares of common stock at the rate of 10.8554, subject to anti-dilution adjustments. In the event of a fundamental change, the MCPS will convert at the fundamental change rates specified in the certificate of designations, and the holders of MCPS would be entitled to a fundamental change make-whole dividend.
We may pay declared dividends in cash or, subject to certain limitations, in shares of our common stock, or in any combination of cash and shares of our common stock in January, April, July and October of each year, commencing on October 1, 2018 and ending on July 1, 2021. Dividends that are declared will be payable on the dividend payment dates to holders of record on the immediately preceding March 15, June 15, September 15 and December 15 (each a “record date”), whether or not such holders convert their shares, or such shares are automatically converted, after the corresponding record date.
Dividends on our MCPS are payable on a cumulative basis when, as and if declared by our Board, at an annual rate of 5.0% of the liquidation preference of $1,000 per share (equivalent to $50.00 annually per share). The dividend on the MCPS for the first dividend period will be $12.78 per share and will be payable, when, as and if declared, on October 1, 2018 to the holders of record at the close of business on September 15, 2018. No dividends on our MCPS were declared as of June 29, 2018.
Subsequent Event
On July 20, 2018, we prepaid $325 million of our outstanding U.S variable interest rate term loan due in 2019. There were no prepayment penalties associated with this payment.
NOTE 6. SALES
On January 1, 2018, we adopted ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”) using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting policy under ASC Topic 605 Revenue Recognition. We recorded an immaterial transition adjustment to opening retained earnings as of January 1, 2018 due to the cumulative impact of adopting Topic 606. The impact to sales as a result of applying Topic 606 was immaterial for the three and six months ended June 29, 2018.
Our significant accounting policies are detailed in Note 2 of our 2017 Annual Report on Form 10-K. Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below and have been applied prospectively from the adoption date of January 1, 2018:

13

Revenue Recognition—We derive revenues primarily from the sale of Professional Instrumentation and Industrial Technologies products and services. Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services. 
For revenue related to a product or service to qualify for recognition, we must have an enforceable contract with a customer that defines the goods or services to be transferred and the payment terms related to those goods or services. Further, collection of substantially all consideration for the goods or services transferred must be probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a combination of financial and qualitative factors, including the customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information.
Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are considered in determining the transaction price for the contract; these allowances and rebates are reflected as a reduction in the contract transaction price. Significant judgment is exercised in determining product returns, customer allowances and rebates, and are estimated based on historical experience and known trends.
Most of our sales contracts contain standard terms and conditions. We evaluate contracts to identify distinct goods and services promised in the contract (performance obligations). Sometimes this evaluation involves judgment to determine whether the goods or services are highly dependent on or highly interrelated with one another, or whether such goods or services significantly modify or customize one another. Certain customer arrangements include multiple performance obligations, typically hardware, installation, training, consulting, services and/or post contract support (“PCS”). Generally, these elements are delivered within the same reporting period, except PCS or other services. We allocate the contract transaction price to each performance obligation using the observable price that the good or service sells for separately in similar circumstances and to similar customers, and/or a residual approach when the observable selling price of a good or service is not known and is either highly variable or uncertain. Allocating the transaction price to each performance obligation sometimes requires significant judgment.
Our principal terms of sale are FOB Shipping Point, or equivalent, and, as such, we primarily record revenue upon shipment as we have transferred control to the customer at that point and our performance obligations are satisfied. We evaluate contracts with delivery terms other than FOB Shipping Point and recognize revenue when we have transfered control and satisfied our performance obligations. If any significant obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation, other services noted above or acceptance by the customer), revenue recognition is deferred until such obligations have been fulfilled. Further, revenue related to separately priced extended warranty and product maintenance agreements is deferred when appropriate and recognized as revenue over the term of the agreement.
Contract Assets — In certain circumstances, we record contract assets which include unbilled amounts typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not only subject to the passage of time. Contract assets were immaterial as of June 29, 2018.
Contract Costs — We incur direct incremental costs to obtain certain contracts, typically sales-related commissions. Deferred sales-related commissions are generally not capitalized as the amortization period is one year or less, and we elected to use the practical expedient to expense these sales commissions as incurred.
Impairment losses recognized on our contract-related assets were immaterial in the three and six months months ended June 29, 2018.
Contract Liabilities — Our contract liabilities consist of deferred revenue generally related to PCS and extended warranty sales, where in most cases we receive up-front payment and recognize revenue over the support term. We classify deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. The noncurrent portion of deferred revenue is included in other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets.
Our contract liabilities consisted of the following ($ in millions):
 
June 29, 2018
 
December 31, 2017
Deferred revenue - current
$
210.5

 
$
213.4

Deferred revenue - noncurrent
91.8

 
86.9

Total contract liabilities
$
302.3

 
$
300.3


14

In the three and six months ended June 29, 2018, we recognized $21 million and $64 million of revenue related to our contract liabilities at January 1, 2018, respectively. The change in our contract liabilities from December 31, 2017 to June 29, 2018 was primarily due to the timing of cash receipts and sales of PCS and extended warranty services.
Remaining Performance Obligations — Our remaining performance obligations represent the transaction price of firm, noncancelable orders, with expected delivery dates to customers greater than one year from June 29, 2018, for which work has not been performed. We have excluded performance obligations with an original expected duration of one year or less from the amounts below.
The aggregate performance obligations attributable to each of our segments is as follows ($ in millions):
 
June 29, 2018
Professional Instrumentation
$
117.0

Industrial Technologies
453.2

Total
$
570.2

The majority of remaining performance obligations are related to service and support contracts, which we expect to fulfill approximately 40 percent within the next two years, approximately 70 percent within the next three years and substantially all within four years.

15

Disaggregation of Revenue
We disaggregate revenue from contracts with customers by geographic location, major product group and end market for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. Disaggregation of revenue for the three months ended June 29, 2018 is presented as follows ($ in millions):
 
Total
 
Professional Instrumentation
 
Industrial Technologies
Geographic:
 
 
 
 
 
United States
$
993.5

 
$
435.9

 
$
557.6

China
161.7

 
101.0

 
60.7

Germany
84.3

 
32.0

 
52.3

All other (each country individually less than 5% of total sales)
616.5

 
320.1

 
296.4

Total
$
1,856.0

 
$
889.0

 
$
967.0

 
 
 
 
 
 
Major Products Group:
 
 
 
 
 
Professional tools and equipment
$
1,245.9

 
$
719.8

 
$
526.1

Industrial automation, controls and sensors
333.5

 
104.8

 
228.7

Franchise distribution
152.2

 
—

 
152.2

All other
124.4

 
64.4

 
60.0

Total
$
1,856.0

 
$
889.0

 
$
967.0

 
 
 
 
 
 
End markets:
 
 
 
 
 
Direct sales:
 
 
 
 
 
  Retail fueling (a)
$
460.9

 
$
—

 
$
460.9

  Industrial & Manufacturing
175.4

 
97.2

 
78.2

  Vehicle repair (a)
137.7

 
—

 
137.7

  Utilities & Power
46.6

 
46.0

 
0.6

  Other
541.4

 
331.8

 
209.6

     Total direct sales
1,362.0

 
475.0

 
887.0

Distributors(a)
494.0

 
414.0

 
80.0

Total
$
1,856.0

 
$
889.0

 
$
967.0

 
 
 
 
 
 
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the three months ended June 29, 2018 was $858.4 million.

16

Disaggregation of revenue for the three months ended June 30, 2017 is presented as follows ($ in millions):
 
Total
 
Professional Instrumentation
 
Industrial Technologies
Geographic:
 
 
 
 
 
United States
$
888.9

 
$
353.7

 
$
535.2

China
134.2

 
91.9

 
42.3

Germany
71.7

 
27.5

 
44.2

All other (each country individually less than 5% of total sales)
534.0

 
285.9

 
248.1

Total
$
1,628.8

 
$
759.0

 
$
869.8

 
 
 
 
 
 
Major Products Group:
 
 
 
 
 
Professional tools and equipment
$
1,055.0

 
$
593.3

 
$
461.7

Industrial automation, controls and sensors
305.6

 
98.5

 
207.1

Franchise distribution
149.5

 
—

 
149.5

All other
118.7

 
67.2

 
51.5

Total
$
1,628.8

 
$
759.0

 
$
869.8

 
 
 
 
 
 
End markets:
 
 
 
 
 
Direct sales:
 
 
 
 
 
  Retail fueling (a)
$
401.5

 
$
—

 
$
401.5

  Industrial & Manufacturing
103.6

 
57.5

 
46.1

  Vehicle repair (a)
135.6

 
—

 
135.6

  Utilities & Power
59.3

 
57.9

 
1.4

  Other
498.7

 
288.2

 
210.5

     Total direct sales
1,198.7

 
403.6

 
795.1

Distributors(a)
430.1

 
355.4

 
74.7

Total
$
1,628.8

 
$
759.0

 
$
869.8

 
 
 
 
 
 
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the three months ended June 30, 2017 was $774.2 million.

17

Disaggregation of revenue for the six months ended June 29, 2018 is presented as follows ($ in millions):
 
Total
 
Professional Instrumentation
 
Industrial Technologies
Geographic:
 
 
 
 
 
United States
$
1,910.3

 
$
844.3

 
$
1,066.0

China
318.1

 
209.3

 
108.8

Germany
170.8

 
67.9

 
102.9

All other (each country individually less than 5% of total sales)
1,197.5

 
639.2

 
558.3

Total
$
3,596.7

 
$
1,760.7

 
$
1,836.0

 
 
 
 
 
 
Major Products Group:
 
 
 
 
 
Professional tools and equipment
$
2,366.0

 
$
1,426.3

 
$
939.7

Industrial automation, controls and sensors
661.3

 
209.4

 
451.9

Franchise distribution
325.1

 
—

 
325.1

All other
244.3

 
125.0

 
119.3

Total
$
3,596.7

 
$
1,760.7

 
$
1,836.0

 
 
 
 
 
 
End markets:
 
 
 
 
 
Direct sales:
 
 
 
 
 
  Retail fueling (a)
$
809.6

 
$
—

 
$
809.6

  Industrial & Manufacturing
331.6

 
187.8

 
143.8

  Vehicle repair (a)
296.4

 
—

 
296.4

  Utilities & Power
102.7

 
101.5

 
1.2

  Other
1,059.3

 
632.6

 
426.7

     Total direct sales
2,599.6

 
921.9

 
1,677.7

Distributors(a)
997.1

 
838.8

 
158.3

Total
$
3,596.7

 
$
1,760.7

 
$
1,836.0

 
 
 
 
 
 
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the six months ended June 29, 2018 was $1,647.3 million.

18

Disaggregation of revenue for the six months ended June 30, 2017 is presented as follows ($ in millions):
 
Total
 
Professional Instrumentation
 
Industrial Technologies
Geographic:
 
 
 
 
 
United States
$
1,735.7

 
$
684.1

 
$
1,051.6

China
264.1

 
182.4

 
81.7

Germany
141.3

 
56.2

 
85.1

All other (each country individually less than 5% of total sales)
1,022.9

 
552.4

 
470.5

Total
$
3,164.0

 
$
1,475.1

 
$
1,688.9

 
 
 
 
 
 
Major Products Group:
 
 
 
 
 
Professional tools and equipment
$
2,016.6

 
$
1,151.9

 
$
864.7

Industrial automation, controls and sensors
596.3

 
194.6

 
401.7

Franchise distribution
321.2

 
—

 
321.2

All other
229.9

 
128.6

 
101.3

Total
$
3,164.0

 
$
1,475.1

 
$
1,688.9

 
 
 
 
 
 
End markets:
 
 
 
 
 
Direct sales:
 
 
 
 
 
  Retail fueling (a)
$
748.0

 
$
—

 
$
748.0

  Industrial & Manufacturing
213.5

 
122.6

 
90.9

  Vehicle repair (a)
293.5

 
—

 
293.5

  Utilities & Power
111.9

 
109.6

 
2.3

  Other
959.2

 
549.9

 
409.3

     Total direct sales
2,326.1

 
782.1

 
1,544.0

Distributors(a)
837.9

 
693.0

 
144.9

Total
$
3,164.0

 
$
1,475.1

 
$
1,688.9

 
 
 
 
 
 
(a) Retail fueling and vehicle repair include sales to these end markets made through third-party distributors. Total distributor sales for the six months ended June 30, 2017 was $1,521.1 million.

19

NOTE 7. PENSION PLANS
For a full description of our noncontributory defined benefit pension plans, including the U.S. plan acquired in 2017, refer to Note 10 of our 2017 Annual Report on Form 10-K.
The following sets forth the components of our net periodic pension costs associated with our noncontributory defined benefit pension plans ($ in millions):
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
U.S. Pension Benefits:
 
 
 
 
 
 
 
Interest cost
$
0.3

 
$
—

 
$
0.6

 
$
—

Expected return on plan assets
(0.3
)
 
—

 
(0.7
)
 
—

Net periodic pension cost
$
—

 
$
—

 
$
(0.1
)
 
$
—

 
 
 
 
 
 
 
 
Non-U.S. Pension Benefits:
 
 
 
 
 
 
 
Service cost
$
0.4

 
$
1.0

 
$
0.9

 
$
2.0

Interest cost
1.5

 
1.5

 
3.0

 
2.9

Expected return on plan assets
(1.8
)
 
(1.8
)
 
(3.7
)
 
(3.6
)
Amortization of net loss
0.9

 
1.1

 
1.8

 
2.2

Net curtailment and settlement loss recognized
0.6

 
—

 
0.6

 
—

Net periodic pension cost
$
1.6

 
$
1.8

 
$
2.6

 
$
3.5

On January 1, 2018, we retrospectively adopted ASU No. 2017-07, Compensation–Retirement Benefits (Topic 715). Accordingly, we have included all components of net periodic pension costs, with the exception of service costs, in other non-operating expenses as a component of non-operating income in the accompanying Consolidated Condensed Statements of Earnings. Service costs continue to be included in cost of sales and selling, general and administrative expenses in the accompanying Consolidated Condensed Statements of Earnings according to the classification of the participant’s compensation. This reclassification of prior year pension cost increased operating income by $0.8 million and $1.5 million for the three and six months ended June 30, 2017, respectively.
Employer Contributions
During 2018, our cash contribution requirements for our non-U.S. defined benefit pension plans are expected to be approximately $10 million. We do not expect to make contributions to the U.S. plan during 2018. The actual amounts to be contributed depend upon, among other things, legal requirements, underlying asset returns, the plan’s funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates and other factors.
NOTE 8. INCOME TAXES
Our effective tax rates for the three and six months ended June 29, 2018 were 17.1% and 16.8%, respectively, as compared to 26.3% and 26.4% for the three and six months ended June 30, 2017, respectively. The decrease for both the three and six month periods is due primarily to favorable impacts in 2018 resulting from a lower statutory tax rate in the United States and foreign-derived intangible income tax benefits, partially offset by the loss of the United States domestic production activities deduction, all of which are a result of the Tax Cuts and Jobs Act (“TCJA”), and other federal and international tax benefits.

20

Our effective tax rates for 2018 and 2017 differ from the U.S. federal statutory rate of 21% and 35%, respectively, due primarily to our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law and the effect of favorable adjustments to the provisional estimates recorded in 2017 related to the TCJA as permitted under SEC Staff Accounting Bulletin No. 118 (“SAB 118”). We recorded an adjustment of $1.9 million to our provisional estimates during the three months ended June 29, 2018, which decreased tax expense and decreased our effective tax rate by 50 basis points, and was attributable to transition taxes, specifically from a decrease in foreign remittance taxes. We recorded an adjustment of $6.1 million to our provisional estimates during the six months ended June 29, 2018, which decreased tax expense and decreased our effective tax rate by 90 basis points, and was related to a $15.1 million decrease from revaluation of certain deferred tax assets and liabilities, a $1.9 million decrease related to transition taxes, specifically from decrease in foreign remittance taxes, and an offsetting $10.9 million increase from a reduction of foreign tax credits. We will continue to evaluate the effects of the TCJA on the 2017 provisional estimates through the end of the SAB 118 allowable measurement period. Refer to Note 11 of our 2017 Annual Report on Form 10-K for further details including disclosures pursuant to SAB 118 interpretive guidance, and provisional estimates for all TCJA effects.
On January 1, 2018, we adopted ASU No. 2016-16, Income Taxes (Topic 715): Intra-entity Transfers of Assets Other Than Inventory using the modified retrospective method, and recorded an immaterial adjustment to opening retained earnings as of January 1, 2018.
NOTE 9. STOCK-BASED COMPENSATION
Our stock-based compensation program (the “Stock Plan”) provides for the grant of stock appreciation rights, performance stock units, restricted stock units, restricted stock awards and performance stock awards (collectively, “Stock Awards”), stock options or any other stock-based award. As of June 29, 2018, approximately 22 million shares of our common stock were available for subsequent issuance under the Stock Plan. For a full description of our stock-based compensation program refer to Note 15 of our 2017 Annual Report on Form 10-K.
Stock-based Compensation Expense
Stock-based compensation has been recognized as a component of selling, general & administrative expenses in the accompanying Consolidated Condensed Statements of Earnings based on the portion of the awards that are ultimately expected to vest.
The following summarizes the components of our stock-based compensation expense under the Stock Plan ($ in millions):
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Stock Awards:
 
 
 
 
 
 
 
Pretax compensation expense
$
8.5

 
$
8.0

 
$
15.6

 
$
15.4

Income tax benefit
(1.8
)
 
(3.1
)
 
(3.3
)
 
(5.6
)
Stock Award expense, net of income taxes
6.7

 
4.9

 
12.3

 
9.8

Stock options:
 
 
 
 
 
 
 
Pretax compensation expense
6.1

 
5.3

 
10.9

 
9.9

Income tax benefit
(1.3
)
 
(1.8
)
 
(2.3
)
 
(3.4
)
Stock option expense, net of income taxes
4.8

 
3.5

 
8.6

 
6.5

Total stock-based compensation:
 
 
 
 
 
 
 
Pretax compensation expense
14.6

 
13.3

 
26.5

 
25.3

Income tax benefit
(3.1
)
 
(4.9
)
 
(5.6
)
 
(9.0
)
Total stock-based compensation expense, net of income taxes
$
11.5

 
$
8.4

 
$
20.9

 
$
16.3


21

The following summarizes the unrecognized compensation cost for the Stock Plan awards as of June 29, 2018. This compensation cost is expected to be recognized over a weighted average period of approximately two years, representing the remaining service period related to the awards. Future compensation amounts will be adjusted for any changes in estimated forfeitures ($ in millions):
Stock Awards
$
59.6

Stock options
56.0

Total unrecognized compensation cost
$
115.6

NOTE 10. COMMITMENTS AND CONTINGENCIES
For a description of our litigation and contingencies, refer to Notes 13 and 14 of our 2017 Annual Report on Form 10-K.
Our operating leases extend for varying periods of time up to twenty years and, in some cases, contain renewal options that would extend existing terms beyond twenty years. Minimum rental payments for all operating leases having initial or remaining noncancelable lease terms in excess of one year for 2018 through 2022 and thereafter are: $48 million in 2018, $42 million in 2019, $31 million in 2020, $20 million in 2021, $16 million in 2022 and $20 million thereafter.
We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from 90 days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of our accrued warranty liability ($ in millions):
Balance, December 31, 2017
$
69.4

Accruals for warranties issued during the period
37.2

Settlements made
(39.4
)
Effect of foreign currency translation
(0.2
)
Balance, June 29, 2018
$
67.0


22

NOTE 11. NET EARNINGS PER SHARE
Basic net earnings per share (“EPS”) is calculated by dividing net earnings attributable to common stockholders by the weighted average number of shares of common stock outstanding for the applicable period. Diluted EPS is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans under the treasury stock method, except where the inclusion of such shares would have an anti-dilutive impact. There were 1.5 million anti-dilutive options to purchase shares excluded from the diluted EPS calculation for both the three and six months ended June 29, 2018. The anti-dilutive options to purchase shares excluded from the diluted EPS calculation were immaterial for the three and six months ended June 30, 2017.
The dilutive impact from our MCPS issued on June 29, 2018 is calculated under the if-converted method.
Information related to the calculation of net earnings per share of common stock is summarized as follows ($ and shares in millions, except per share amounts):
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Numerator
 
 
 
 
 
 
 
Net earnings
$
295.0

 
$
240.1

 
$
556.2

 
$
439.8

Mandatory convertible preferred stock cumulative dividends
(0.2
)
 
—

 
(0.2
)
 
—

Net earnings attributable to common stockholders
$
294.8

 
$
240.1

 
$
556.0

 
$
439.8

 
 
 
 
 
 
 
 
Denominator
 
 
 
 
 
 
 
Weighted average common shares outstanding used in basic earnings per share
349.2

 
347.2

 
348.9

 
347.1

Incremental common shares from:
 
 
 
 
 
 
 
Assumed exercise of dilutive options and vesting of dilutive Stock Awards
5.6

 
5.0

 
5.7

 
4.7

Assumed conversion of outstanding mandatory convertible preferred stock
0.2

 
—

 
0.1

 
—

Weighted average common shares outstanding used in diluted earnings per share
355.0

 
352.2

 
354.7

 
351.8

 
 
 
 
 
 
 
 
Net earnings per common share - Basic
$
0.84

 
$
0.69

 
$
1.59

 
$
1.27

Net earnings per share - Diluted
$
0.83

 
$
0.68

 
$
1.57

 
$
1.25

We declared and paid cash dividends per share during the periods presented as follows:
 
Dividend Per
Common Share
 
Amount
($ in millions)
2018:
 
 
 
First quarter
$
0.07

 
$
24.3

Second quarter
0.07

 
24.4

Total
$
0.14

 
$
48.7

 
 
 
 
2017:
 
 
 
First quarter
$
0.07

 
$
24.3

Second quarter
0.07

 
24.3

Total
$
0.14

 
$
48.6

As of June 29, 2018, no dividends have been declared on our MCPS.

23

NOTE 12. SEGMENT INFORMATION
We report our results in two separate business segments consisting of Professional Instrumentation and Industrial Technologies. When determining the reportable segments, we aggregated operating segments based on their similar economic and operating characteristics. Operating profit amounts in the Other category consist of unallocated corporate costs and other costs not considered part of our evaluation of reportable segment operating performance. As of June 29, 2018, there have been no material changes in total assets or liabilities by segment since December 31, 2017. Segment results are shown below ($ in millions):
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Sales:
 
 
 
 
 
 
 
Professional Instrumentation
$
889.0

 
$
759.0

 
$
1,760.7

 
$
1,475.1

Industrial Technologies
967.0

 
869.8

 
1,836.0

 
1,688.9

Total
$
1,856.0

 
$
1,628.8

 
$
3,596.7

 
$
3,164.0

Operating Profit:
 
 
 
 
 
 
 
Professional Instrumentation
$
219.4

 
$
185.5

 
$
425.8

 
$
344.0

Industrial Technologies
200.9

 
181.7

 
359.2

 
334.5

Other
(37.9
)
 
(18.1
)
 
(64.4
)
 
(33.8
)
Total Operating Profit
382.4

 
349.1

 
720.6

 
644.7

Interest expense
(25.3
)
 
(22.7
)
 
(49.9
)
 
(45.3
)
Other non-operating expenses
(1.1
)
 
(0.8
)
 
(1.8
)
 
(1.5
)
Earnings before income taxes
$
356.0

 
$
325.6

 
$
668.9

 
$
597.9

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 diversified industrial growth company comprised of Professional Instrumentation and Industrial Technologies segments and encompassing businesses that are recognized leaders in attractive markets. Our well-known brands hold leading positions in advanced instrumentation and solutions, transportation technology, sensing, automation and specialty, and franchise distribution markets. Our businesses design, develop, service, manufacture and market professional and engineered products, software and services for a variety of end markets, building upon leading brand names, innovative technology and significant market positions.
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 and combined financial statements included in our 2017 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

24

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; new or modified laws, regulations and accounting pronouncements; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; impact on changes to tax laws; general economic and capital markets conditions; 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. 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 the following:
•
Conditions in the global economy, the markets we serve and the financial markets may adversely affect our business and financial statements. Furthermore, significant uncertainties related to changes in governmental policies toward international trade currently exist, and depending on how such uncertainties are resolved, could have a material adverse effect on our financial results.
•
Potential changes in international trade relations between China and the United States could have a material adverse effect on our business and financial statements.
•
Our growth could suffer if the markets into which we sell our products, software 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, software and services.
•
Changes in industry standards, governmental regulations and applicable laws may reduce demand for our products, software or services or increase our expenses.
•
Any inability to consummate acquisitions at our historical rate and at appropriate prices could negatively impact our growth rate and stock price.
•
Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products, software and services based on technological innovation.
•
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 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.

25

•
We are pursuing a plan to combine four operating companies from our Automation & Specialty platform into a new company and to merge that new company into a subsidiary of Altra Industrial Motion Corp. in a tax-efficient transaction. The proposed transaction may not be completed on the currently contemplated timeline or at all and may not achieve the intended benefits.
•
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, business and financial statements.
•
Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our business, financial statements and reputation.
•
International economic, trade, political, legal, compliance and business factors could negatively affect our business and financial statements.
•
We may be required to recognize impairment charges for our goodwill and other intangible assets.
•
Foreign currency exchange rates may adversely affect our financial statements.
•
Changes in our 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 have incurred a significant amount of debt, and our debt will increase further if we incur additional debt and do not retire existing debt.
•
We 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.
•
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, software or services.
•
Defects and unanticipated use or inadequate disclosure with respect to our products, 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 financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations.
•
If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, 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.
•
A significant disruption in, or breach in security of, information technology systems we use could adversely affect our business.
•
Our restructuring actions could have long-term adverse effects on our business.
•
Work stoppages, union and works council campaigns and other labor disputes could adversely impact our productivity 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.
•
Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.
•
Our amended and restated certificate of incorporation designates the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the

26

sole and exclusive forum for certain types of actions and proceedings that may be initiated by our shareholders which could discourage lawsuits against us and our directors and officers.
•
As an independent, publicly traded company, we may not enjoy the same benefits that we did as a part of Danaher Corporation (“Danaher” or “Former Parent”).
•
Potential indemnification liabilities to Danaher pursuant to our separation agreement with Danaher could materially and adversely affect our businesses, financial condition, results of operations and cash flows.
•
In connection with our separation from Danaher, Danaher has indemnified us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Danaher’s ability to satisfy its indemnification obligation will not be impaired in the future.
•
There could be significant liability if the separation from Danaher fails to qualify as a tax-free transaction for U.S. federal income tax purposes.
See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Form 10-Q for the fiscal quarter ended March 30, 2018 and “Part II – Item 1A. Risk Factors” in this Form 10-Q for a 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. 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 diversified, multinational industrial growth company with global operations and our businesses are affected by worldwide, regional and industry-specific economic and political factors. Our geographic and industry diversity, as well as the range of our products, software and services, 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 to the extent possible their sales, 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 and continue to reduce costs and improve operating efficiency and quality, 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.
In this report, references to sales from existing businesses refers to sales from operations calculated according to generally accepted accounting principles in the United States (“GAAP”) but excluding (1) the impact from acquired 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 divested businesses or product lines not considered discontinued operations prior to the first anniversary of the divestiture. The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales impact from acquired businesses) and (b) the period-to-period change in sales (excluding sales impact from acquired businesses) after applying the current period foreign exchange rates to the prior year period. 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 sales from existing businesses provides useful information to investors by helping identify underlying growth trends in our business and facilitating comparisons of our sales

27

performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisitions 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 sales from existing businesses 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 refer to the impact of both price and unit sales.
Business Performance and Outlook
While differences exist among our businesses, on an overall basis, demand for our products, software and services increased during the three months ended June 29, 2018 as compared to the comparable period of 2017 resulting in aggregate year-over-year total sales growth of 13.9% and sales growth from existing businesses of 5.3%. Our continued application and deployment of the Fortive Business System including investments in sales growth initiatives and new product introductions, as well as increased demand in both high-growth and developed markets and other business-specific factors discussed below, contributed to overall sales growth from existing businesses across the majority of our businesses in the period.
On a year-over-year basis, sales growth from existing businesses was broad based across our businesses in both our Professional Instrumentation and Industrial Technologies segments. We are beginning to see an improvement in our Transportation Technologies businesses as a result of the approaching deadline of the liability shift related to the enhanced credit card security requirements in the Unites States based on the Europay, Mastercard and Visa (“EMV”) global standards.
Geographically, sales from existing businesses grew at a mid-single digit rate in both developed and high-growth markets during the three months ended June 29, 2018 as compared to the comparable 2017 period. Year-over-year sales from existing businesses grew at a low double-digit rate in China, at a mid-single digit rate North America and at a low-single digit rate in Western Europe during the three months ended June 29, 2018.
We expect overall sales from existing businesses to continue to grow on a year-over-year basis during the remainder of 2018; however, we continue to monitor developments from macro-economic and geopolitical uncertainties, including global uncertainties related to governmental policies toward international trade, monetary and fiscal policies; including the current uncertainty about the future relationship between the United States and China with respect to trade policies, treaties, government regulations, and tariffs. We are also monitoring other factors identified above in “—Information Relating to Forward-Looking Statements.”
Pending Acquisitions
Advanced Sterilization Products
On June 6, 2018, we made a binding offer to Ethicon, Inc., a subsidiary of Johnson & Johnson, to purchase its Advanced Sterilization Products (“ASP”) business for approximately $2.7 billion in cash. The transaction is expected to close no later than early 2019 and is subject to customary closing conditions, including regulatory approvals.
ASP is a leading global provider of innovative sterilization and disinfection solutions and pioneered low-temperature hydrogen peroxide sterilization technology. ASP’s products, which are sold globally, include the STERRAD system for sterilizing instruments and the EVOTECH and ENDOCLENS systems for endoscope reprocessing and cleaning.

Gordian
On July 2, 2018, we entered into a definitive agreement to acquire TGG Ultimate Holdings, Inc. and its subsidiaries, including The Gordian Group, Inc. (“Gordian”), a privately-held, leading provider of construction cost data, software and service. The purchase price for the acquisition is $775 million and the transaction is expected to close in the third quarter of 2018. The acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to be financed with available cash.

Gordian’s comprehensive offerings serve the entire building lifecycle and provide workflow solutions to optimize every stage of an asset owner’s construction and maintenance needs, including connecting the owner and contractors in the same exchange and providing access to cost and facilities metrics databases via a subscription-based model.

28

Planned Divestiture of A&S Business
On March 7, 2018, we entered into a definitive agreement to combine four of our operating companies from our Automation & Specialty platform (the “A&S Business”) with Altra Industrial Motion Corp (“Altra”) in a tax-efficient Reverse Morris Trust transaction. In the transaction, we will receive approximately $1.4 billion in cash and debt retirement, and our shareholders will receive in the aggregate 35 million shares of Altra, representing approximately 54% of outstanding shares of Altra common stock immediately following the transaction. The A&S Business includes the market-leading brands of Kollmorgen, Thomson, Portescap and Jacobs Vehicle Systems, and generated approximately $907 million in revenue for the year ended December 31, 2017. The transaction is expected to close by the end of 2018, subject to customary closing conditions, including receipt of certain regulatory approvals, Altra shareholder approval and our receipt of confirmation of the tax treatment of certain matters. Upon closing of the transaction, we will classify the A&S Business as discontinued operations in our financial statements.
RESULTS OF OPERATIONS
Sales Growth
The following tables summarize total aggregate year-over-year sales growth and the components of aggregate year-over-year sales growth during the three and six months ended June 29, 2018 as compared to the comparable periods of 2017:
Components of Sales Growth
 
% Change
Three Months Ended
June 29, 2018 vs.
Comparable 2017
Period
 
% Change
Six Months Ended
June 29, 2018 vs.
Comparable 2017
Period
Total revenue growth (GAAP)
13.9
%
 
13.7
%
Existing businesses (Non-GAAP)
5.3
%
 
4.0
%
Acquisitions (Non-GAAP)
7.0
%
 
7.2
%
Currency exchange rates (Non-GAAP)
1.6
%
 
2.5
%
Operating Profit Margins
Operating profit margin was 20.6% for the three months ended June 29, 2018, a decrease of 80 basis points as compared to 21.4% in the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
•
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, net of the incremental year-over-year costs associated with various product development and sales and marketing growth investments — 50 basis points
Year-over-year operating profit margin comparisons were unfavorably impacted by:
•
The incremental year-over-year net dilutive effect of acquired businesses — 70 basis points
•
The incremental year-over-year net dilutive effect of acquisition and divestiture-related transaction costs — 60 basis points
Operating profit margin was 20.0% for the six months ended June 29, 2018, a decrease of 40 basis points as compared to 20.4% in the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
•
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, net of the incremental year-over-year costs associated with various product development and sales and marketing growth investments — 80 basis points
Year-over-year operating profit margin comparisons were unfavorably impacted by:
•
The incremental year-over-year net dilutive effect of acquired businesses — 80 basis points
•
The incremental year-over-year net dilutive effect of acquisition and divestiture-related transaction costs — 40 basis points

29

Business Segments
Sales by business segment for each of the periods indicated were as follows ($ in millions):
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Professional Instrumentation
$
889.0

 
$
759.0

 
$
1,760.7

 
$
1,475.1

Industrial Technologies
967.0

 
869.8

 
1,836.0

 
1,688.9

Total
$
1,856.0

 
$
1,628.8

 
$
3,596.7

 
$
3,164.0

PROFESSIONAL INSTRUMENTATION
The Professional Instrumentation segment consists of our Advanced Instrumentation & Solutions and Sensing Technologies businesses. The Advanced Instrumentation & Solutions businesses provide product realization and field solutions services and products. Field solutions include a variety of compact professional test tools, thermal imaging and calibration equipment for electrical, industrial, electronic and calibration applications, online condition-based monitoring equipment; portable gas detection equipment, consumables, and software as a service (SaaS) offerings including safety/user behavior, asset management, and compliance monitoring; subscription-based technical, analytical, and compliance services to determine occupational and environmental radiation exposure; and computerized maintenance management software for critical infrastructure in utility, industrial, energy, construction, public safety, mining, and healthcare applications. Product realization services and products help developers and engineers across the end-to-end product creation cycle from concepts to finished products and also include highly-engineered energetic materials components in specialized vertical applications. Our Sensing Technologies business offers devices that sense, monitor and control operational or manufacturing variables, such as temperature, pressure, level, flow, turbidity and conductivity.
Professional Instrumentation Selected Financial Data
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Sales
$
889.0

 
$
759.0

 
$
1,760.7

 
$
1,475.1

Operating profit
219.4

 
185.5

 
425.8

 
344.0

Depreciation
15.5

 
8.7

 
32.5

 
17.5

Amortization
16.3

 
7.7

 
33.5

 
15.5

Operating profit as a % of sales
24.7
%
 
24.4
%
 
24.2
%
 
23.3
%
Depreciation as a % of sales
1.7
%
 
1.1
%
 
1.8
%
 
1.2
%
Amortization as a % of sales
1.8
%
 
1.0
%
 
1.9
%
 
1.1
%
Components of Sales Growth
 
% Change
Three Months Ended
June 29, 2018 vs.
Comparable 2017
Period
 
% Change
Six Months Ended
June 29, 2018 vs.
Comparable 2017
Period
Total revenue growth (GAAP)
17.1
%
 
19.4
%
Existing businesses (Non-GAAP)
3.4
%
 
4.4
%
Acquisitions (Non-GAAP)
11.9
%
 
12.1
%
Currency exchange rates (Non-GAAP)
1.8
%
 
2.9
%
Sales from existing businesses in the segment’s Advanced Instrumentation & Solutions businesses grew at a low-single digit and mid-single digit rate during the three and six months ended June 29, 2018, respectively, as compared to the comparable periods of 2017. Year-over-year sales from existing businesses of field solutions products and services grew at a mid-single digit rate during the three and six months ended June 29, 2018, due to continued strong demand for industrial test and thermography equipment, network tools and SaaS offerings, offset somewhat by declines in demand for electrical grid condition-based monitoring equipment. Year-over-year sales from existing businesses of product realization solutions increased slightly during the three months ended June 29, 2018 and grew at a low-single digit rate during the six months ended June 29, 2018, as compared to the comparable periods of 2017, driven primarily by continued growth in the industrial and

30

manufacturing end market as well as increased demand for oscilloscopes and new product introductions. These increases were partly offset by declines in the consumer electronics end-market, lower demand for design, engineering and manufacturing services as well as in the segment’s energetic materials business during the three and six months ended June 29, 2018. Geographically, demand from existing businesses increased on a year-over-year basis in North America, Western Europe and Japan during the three and six months ended June 29, 2018, which was partially offset by declines in Korea. In addition, demand from existing businesses increased in China during the six months ended June 29, 2018.
Sales from existing businesses in the segment’s Sensing Technologies businesses grew at a mid-single digit rate during the three and six months ended June 29, 2018, respectively, as compared to the comparable periods of 2017 largely due to increased year-over-year demand in the industrial end market. Geographically, increases in sales from existing businesses on a year-over-year basis during the three and six months ended June 29, 2018 were driven by growth in Asia and Western Europe.
Year-over-year price increases in the Professional Instrumentation segment contributed 0.6% and 0.7% during the three and six months ended June 29, 2018, respectively, as compared to the comparable periods of 2017 and are reflected as a component of the change in sales from existing businesses.
Operating profit margin increased 30 basis points during the three months ended June 29, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
•
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates net of incremental year-over-year costs associated with various product development and sales and marketing growth investments — 180 basis points
Year-over-year operating profit margin comparisons were unfavorably impacted by:
•
The incremental year-over-year net dilutive effect of acquired businesses — 150 basis points
Operating profit margin increased 90 basis points during the six months ended June 29, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were favorably impacted by:
•
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates net of incremental year-over-year costs associated with various product development and sales and marketing growth investments — 240 basis points
Year-over-year operating profit margin comparisons were unfavorably impacted by:
•
The incremental year-over-year net dilutive effect of acquired businesses — 150 basis points

31

INDUSTRIAL TECHNOLOGIES
The Industrial Technologies segment consists of our Transportation Technologies, Automation & Specialty Components and Franchise Distribution businesses. Our Transportation Technologies business is a leading worldwide provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management, and traffic management. The Automation & Specialty Components business provides a wide range of electromechanical and electronic motion control products and mechanical components, as well as supplemental braking systems for commercial vehicles. Our Franchise Distribution business manufactures and distributes professional tools and a full-line of wheel service equipment.
Industrial Technologies Selected Financial Data
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Sales
$
967.0

 
$
869.8

 
$
1,836.0

 
$
1,688.9

Operating profit
200.9

 
181.7

 
359.2

 
334.5

Depreciation
18.4

 
14.4

 
34.8

 
28.5

Amortization
7.8

 
5.6

 
15.6

 
11.1

Operating profit as a % of sales
20.8
%
 
20.9
%
 
19.6
%
 
19.8
%
Depreciation as a % of sales
1.9
%
 
1.7
%
 
1.9
%
 
1.7
%
Amortization as a % of sales
0.8
%
 
0.6
%
 
0.8
%
 
0.7
%
Components of Sales Growth
 
% Change
Three Months Ended
June 29, 2018 vs.
Comparable 2017
Period
 
% Change
Six Months Ended
June 29, 2018 vs.
Comparable 2017
Period
Total revenue growth (GAAP)
11.2
%
 
8.7
%
Existing businesses (Non-GAAP)
6.9
%
 
3.6
%
Acquisitions (Non-GAAP)
2.8
%
 
2.8
%
Currency exchange rates (Non-GAAP)
1.5
%
 
2.3
%
Sales from existing businesses in the segment’s Transportation Technologies businesses grew at a high-single digit rate during the three months ended June 29, 2018 and were up slightly during the six months ended June 29, 2018, as compared to the comparable periods of 2017. These results were largely attributable to strong demand for dispenser systems, payment solutions primarily in North America and fuel management systems primarily in China during the three months ended June 29, 2018 as compared to the comparable periods of 2017.  We are beginning to see an improvement in year-over-year demand as a result of the approaching deadline of the liability shift related to the enhanced credit card security requirements in the United States based on the EMV global standards. Geographically, sales from existing businesses increased on a year-over-year basis during the three months ended June 29, 2018 due to strong growth in China, India and North America, which was partially offset by declines in Western Europe. Sales from existing businesses during the six months ended June 29, 2018 were primarily driven by strong growth in China and Latin America, offset by declines in Western Europe and North America.
Sales from existing businesses in the segment’s Automation & Specialty Components businesses grew at a high single-digit and low double digit rate during the three and six months ended June 29, 2018, respectively, compared to the comparable periods of 2017. The results were largely attributable to increased year-over-year demand in industrial and robotics end-markets in Western Europe, North America and China, and strong demand for engine retarder products in the United States, which benefited from improved heavy-duty truck production, and in China. Geographically, increases in sales from existing businesses on a year-over-year basis during the three and six months ended June 29, 2018 were driven by strong growth in North America, Western Europe and China.
Sales from existing businesses in the segment’s Franchise Distribution businesses increased at a low-single digit rate during the three and six months ended June 29, 2018, respectively, compared to the comparable periods of 2017. We recognized sequential growth in tool storage and specialty tools during the three months ended June 29, 2018, and increased demand for hardline and specialty tools contributed to the year-over-year growth during the six months ended June 29, 2018.

32

Year-over-year price increases in the Industrial Technologies segment contributed 0.5% and 0.4% during the three and six months ended June 29, 2018 as compared to the comparable period of 2017, and are reflected as a component of the change in sales from existing businesses.
Operating profit margin decreased 10 basis points during the three months ended June 29, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were unfavorably impacted by:
•
The incremental year-over-year net dilutive effect of acquired businesses — 40 basis points
Year-over-year operating profit margin comparisons were favorably impacted by:
•
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, partially offset by incremental year-over-year costs associated with various product development and sales and marketing growth investments — 30 basis points
Operating profit margin decreased 20 basis points during the six months ended June 29, 2018 as compared to the comparable period of 2017. Year-over-year operating profit margin comparisons were unfavorably impacted by:
•
The incremental year-over-year net dilutive effect of acquired businesses — 50 basis points
Year-over-year operating profit margin comparisons were favorably impacted by:
•
Higher 2018 sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and changes in currency exchange rates, partially offset by incremental year-over-year costs associated with various product development and sales and marketing growth investments — 30 basis points
COST OF SALES AND GROSS PROFIT
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Sales
$
1,856.0

 
$
1,628.8

 
$
3,596.7

 
$
3,164.0

Cost of sales
(917.1
)
 
(823.7
)
 
(1,787.0
)
 
(1,614.9
)
Gross profit
$
938.9

 
$
805.1

 
$
1,809.7

 
$
1,549.1

Gross profit margin
50.6
%
 
49.4
%
 
50.3
%
 
49.0
%
The year-over-year increase in cost of sales during the three and six months ended June 29, 2018 as compared to the comparable periods in 2017 is due primarily to the impact of higher year-over-year sales volumes from existing businesses, incremental year-over-year cost of sales from our recently acquired businesses and changes in currency exchange rates, partly offset by incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and material cost and supply chain improvement actions.
The year-over-year increase in gross profit, and the related 120 and 130 basis point increase in gross profit margin for the three and six months ended June 29, 2018, respectively, as compared to the comparable periods in 2017 is due primarily to the favorable impact of pricing improvements and higher year-over-year sales volumes from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and material cost and supply chain improvement actions.
OPERATING EXPENSES
 
Three Months Ended
 
Six Months Ended
($ in millions)
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Sales
$
1,856.0

 
$
1,628.8

 
$
3,596.7

 
$
3,164.0

Selling, general and administrative (“SG&A”) expenses
445.5

 
356.9

 
869.2

 
709.1

Research and development (“R&D”) expenses
111.0

 
99.1

 
219.9

 
195.3

SG&A as a % of sales
24.0
%
 
21.9
%
 
24.2
%
 
22.4
%
R&D as a % of sales
6.0
%
 
6.1
%
 
6.1
%
 
6.2
%

33

SG&A expenses increased during the three and six months ended June 29, 2018 as compared to the comparable periods of 2017 due primarily to continued investments in our sales and marketing growth initiatives, incremental year-over-year general and administrative expenses, incremental expenses from recently acquired businesses, increased depreciation and amortization expense due primarily to our recently acquired businesses and costs associated with the divestiture of the A&S businesses and announced acquisitions. These increases were partly offset by incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives. On a year-over-year basis, SG&A expenses as a percentage of sales increased 210 and 180 basis points in the three and six months ended June 29, 2018, respectively, due primarily to acquisition and divestiture-related transaction costs incurred during the three and six months ended June 29, 2018, and higher relative spending levels at our recently acquired businesses.
We expect to recognize significant acquisition and divestiture-related costs associated with the divestiture of the A&S businesses and announced acquistions in the second half of 2018.
R&D expenses (consisting principally of internal and contract engineering personnel costs) increased during the three and six months ended June 29, 2018 as compared to the comparable periods of 2017 due to incremental year-over-year investments in our product development initiatives. On a year-over-year basis, R&D expenses as a percentage of sales were relatively flat during both the three and six months ended June 29, 2018.
INTEREST COSTS
For a discussion of our outstanding indebtedness, refer to Note 5 to the accompanying Consolidated Condensed Financial Statements.
Net interest expense of $25 million and $50 million was recorded for the three and six months ended June 29, 2018, respectively, compared to $23 million and $45 million for the three and six months ended June 30, 2017, respectively.
INCOME TAXES
Our effective tax rates for the three and six months ended June 29, 2018 were 17.1% and 16.8%, respectively, as compared to 26.3% and 26.4% for the three and six months ended June 30, 2017, respectively. The year-over-year decrease was due primarily to favorable impacts in 2018 resulting from a lower statutory tax rate in the United States as a result of the Tax Cuts and Jobs Act (“TCJA”) as well as other federal and international tax benefits.
Our effective tax rates for 2018 and 2017 differ from the U.S. federal statutory rate of 21% and 35%, respectively, due primarily to our earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law and the effect of favorable adjustments to the provisional estimates recorded in 2017 related to the TCJA as permitted under SEC Staff Accounting Bulletin No. 118 (“SAB 118”). We recorded an adjustment of $1.9 million to our provisional estimates during the three months ended June 29, 2018, which decreased tax expense and our effective tax rate by 50 basis points, and was attributable to transition taxes, specifically from a decrease in foreign remittance taxes. We recorded an adjustment of $6.1 million to our provisional estimates during the six months ended June 29, 2018, which decreased tax expense and our effective tax rate by 90 basis points, and was related to a $15.1 million decrease from revaluation of certain deferred tax assets and liabilities, a $1.9 million decrease related to transition taxes, specifically from decrease in foreign remittance taxes, and an offsetting $10.9 million increase from a reduction of foreign tax credits. We will continue to evaluate the effects of the TCJA on the 2017 provisional estimates through the end of the SAB 118 allowable measurement period. Refer to Note 11 of our 2017 Annual Report on Form 10-K for further details including disclosures pursuant to SAB 118 interpretive guidance, and provisional estimates for all TCJA effects.
COMPREHENSIVE INCOME
Comprehensive income decreased by $90 million during the three months ended June 29, 2018 as compared to the comparable period in 2017, due primarily to unfavorable changes in foreign currency translation adjustments of $145 million that were partially offset by net earnings that were higher by $55 million.
Comprehensive income decreased by $36 million during the six months ended June 29, 2018 as compared to the comparable period in 2017, due primarily to unfavorable changes in foreign currency translation adjustments of $152 million that were partially offset by net earnings that were higher by $116 million.
INFLATION
The effect of inflation on our sales and net earnings was not significant in the three and six month periods ended June 29, 2018.

34

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 expect 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.
Overview of Cash Flows and Liquidity
Following is an overview of our cash flows and liquidity for the six months ended June 29, 2018:
 
Six Months Ended
($ in millions)
June 29, 2018
 
June 30, 2017
Net cash provided by operating activities
$
512.8

 
$
394.0

 
 
 
 
Cash paid for acquisitions
$
(9.3
)
 
$
—

Payments for additions to property, plant and equipment
(58.7
)
 
(55.6
)
All other investing activities
3.9

 
(3.0
)
Net cash used in investing activities
$
(64.1
)
 
$
(58.6
)
 
 
 
 
Net repayments of borrowings (maturities of 90 days or less)
$
(326.0
)
 
$
(158.8
)
Proceeds from issuance of mandatory convertible preferred stock net of $36 million of issuance costs
1,338.2

 
—

Payment of dividends
(48.7
)
 
(48.6
)
All other financing activities
15.3

 
7.3

Net cash provided (used) by financing activities
$
978.8

 
$
(200.1
)
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, various employee liabilities, restructuring activities and other items impact reported cash flows.
Operating cash flows were approximately $513 million for the first six months of 2018, an increase of $119 million, or approximately 30%, as compared to the comparable period of 2017. The year-over-year change in operating cash flows was primarily attributable to the following factors:
•
2018 operating cash flows benefited from higher net earnings for the first six months of 2018 as compared to the comparable period in 2017. Net earnings for the six months ended June 29, 2018 benefited from a year-over-year increase in operating profits of $76 million, partially offset by a year-over-year increase in net interest expense of $5 million associated with our Commercial Paper Programs. The year-over-year increase in operating profit also includes a year-over-year increase in depreciation and amortization expenses of $44 million largely attributable to recently acquired businesses. Depreciation and amortization are noncash expenses that decrease earnings without a corresponding impact to operating cash flows.
•
The aggregate of accounts receivable, inventories and trade accounts payable used $81 million of cash during the first six months of 2018 compared to using $57 million of cash in the comparable period of 2017. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventories and trade accounts payable depends upon how effectively we manage the cash conversion cycle, which effectively 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 of prepaid expenses and other assets and accrued expenses and other liabilities used $107 million of cash during the first six months of 2018 as compared to using $88 million of cash in the comparable period of 2017. The timing of tax refunds drove the majority of this change.

35

Investing Activities
Cash flows relating to investing activities consist primarily of cash used for acquisitions and capital expenditures. Net cash used in investing activities increased $6 million during the six months ended June 29, 2018 as compared to the comparable period of 2017, due primarily to a business acquisition completed during the six months ended June 29, 2018.    
Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting product development initiatives, improving information technology systems and purchasing equipment that is used in operating-type lease arrangements with customers. For the full year 2018, we expect capital spending to be between approximately $125 million and $135 million, though 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 repayments of commercial paper and other debt, the issuance of shares of 5.0% Mandatory Convertible Preferred Stock, Series A (“MCPS”) and payments of quarterly cash dividends to shareholders. Financing activities generated cash of $979 million during the six months ended June 29, 2018, of which $1.34 billion was due to MCPS, as compared to using approximately $200 million of cash in the comparable period in 2017. In the six months ended June 29, 2018, we made net repayments of commercial paper under the U.S. and Euro commercial paper programs (“Commercial Paper Programs”) of $326 million and paid $49 million of cash dividends to shareholders.
On June 29, 2018, we issued 1,380,000 shares of MCPS with a par value of $0.01 per share and liquidation preference of $1,000 per share, which included the exercise of an over-allotment option in full to purchase 180,000 shares. We received $1.34 billion in proceeds from the issuance of the MCPS, net of $36 million of issuance costs. We will use the net proceeds from the issuance of MCPS to fund our acquisition activities and for general corporate purposes, including repayment of debt, working capital and capital expenditures. We expect to pay up to an additional $1.5 million in issuance costs in the third quarter of 2018.
We generally expect to satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through issuances of commercial paper under the Commercial Paper Programs. Credit support for the Commercial Paper Programs is provided by our five-year, $1.5 billion senior unsecured revolving credit facility that expires on June 16, 2021 (“Revolving Credit Facility”). We classified our borrowings outstanding under the Commercial Paper Programs as long-term debt in the accompanying Consolidated Condensed Balance Sheet as of June 29, 2018, as we have the intent and ability, as supported by availability under the Revolving Credit Facility, to refinance these borrowings for at least one year from the balance sheet date.  As commercial paper obligations mature, we may issue additional short-term commercial paper obligations to refinance all or part of these borrowings.
We had $1.5 billion available under the Revolving Credit Facility as of June 29, 2018. Of this amount, approximately $615 million was being used to backstop outstanding U.S. and Euro commercial paper balances.  Accordingly, we had the ability to incur an additional $0.9 billion of indebtedness under the Revolving Credit Facility as of June 29, 2018. Refer to Note 5 of the Consolidated Condensed Financial Statements for information regarding our financing activities and indebtedness.
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. We expect to limit any borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, to repay all of the outstanding commercial paper as it matures.
As of June 29, 2018, commercial paper outstanding under the U.S. dollar-denominated commercial paper program had an annual effective rate of 2.39% and a weighted average remaining maturity of approximately 9 days. As of June 29, 2018, commercial paper outstanding under the Euro-denominated commercial paper program had an annual effective rate of (0.10)% and a weighted average remaining maturity of approximately 76 days.
Pursuant to our senior note and term loan agreements, $799 million of our long-term debt is scheduled for maturity and repayment in June 2019. Accordingly, we have classified these as short-term debt on the accompanying Consolidated Condensed Balance Sheet. On July 20, 2018, we prepaid $325 million of our outstanding U.S variable interest rate term loan due in 2019. There were no prepayment penalties associated with this payment.

36

Dividends
On April 12, 2018, we declared a regular quarterly dividend of $0.07 per share paid on June 29, 2018 to holders of record on May 25, 2018. For the six months ended June 29, 2018, cash dividend payments of $48.7 million were recorded as dividends to shareholders in the Consolidated Condensed Statement of Changes in Equity.
Dividends on our MCPS are payable on a cumulative basis when, as and if declared by our Board, at an annual rate of 5.0% of the liquidation preference of $1,000 per share (equivalent to $50.00 annually per share). The dividend on the MCPS for the first dividend period will be $12.78 per share and will be payable, when, as and if declared, on October 1, 2018 to the holders of record at the close of business on September 15, 2018. No dividends on our MCPS have been declared as of June 29, 2018.
Cash and Cash Requirements
As of June 29, 2018, we held approximately $2,368.2 million of cash and cash equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less with an annual effective interest rate that approximated 1.35% during the three months ended June 29, 2018. Approximately 60% of the cash balance as of June 29, 2018 was held within the United States and relates primarily to the proceeds received from the issuance of our MCPS on June 29, 2018.
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 restructuring activities and 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, we may also borrow under our commercial paper programs or credit facilities, 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 and/or access the capital markets. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions.
The TCJA that was enacted in December 2017 is materially improving our U.S. liquidity through lower corporate tax rates and enhanced cash repatriation. During the first six months of 2018, we repatriated $187.4 million and expect to repatriate an additional $87.6 million during the second half of 2018. These repatriations are subject to an estimated $3.1 million in foreign remittance taxes.
As of June 29, 2018, we recorded a current liability for the funds we have or intend to repatriate under the TCJA final transition tax. Conversely, 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. Such earnings are intended for indefinite foreign reinvestment and no provision for non-U.S. 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 expect the TCJA to have a favorable impact in our future ability to engage in acquisition activities.
As of June 29, 2018, we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future, including our cash needs in the United States.
CRITICAL ACCOUNTING ESTIMATES
There were no material changes during the three and six months ended June 29, 2018 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 2017 Annual Report on Form 10-K. Changes to our accounting policy for revenue recognition as a result of adopting ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”) are discussed in Note 6 to the consolidated condensed financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 2017 Annual Report on Form 10-K. There were no material changes during the three months ended June 29, 2018 to the information reported in our 2017 Annual Report on Form 10-K.

37

ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of the President and Chief Executive Officer, and 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 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.

38

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 Related to Forward-Looking Statements,” in Part I - Item 2 of this Form 10-Q, in the “Risk Factors” section of our 2017 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2018. Other than as provided below, there were no material changes during the quarter ended June 29, 2018 to the risk factors reported in the “Risk Factors” section of our 2017 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2018.
Potential changes in international trade relations between China and the United States could have a material adverse effect on our business and financial statements.
In recent years, we have experienced growth in various end markets in China. During 2017, year-over-year sales from existing businesses grew at a rate in the mid-teens in China, and sales in China accounted for approximately 9% of our total sales for the year ended December 31, 2017. In addition, we have numerous facilities in China, many of which serve multiple businesses and are used for multiple purposes.
There is currently significant uncertainty about the future relationship between the United States and China, including with respect to trade policies, treaties, government regulations and tariffs. The current U.S. presidential administration has called for substantial changes to U.S. foreign trade policy with respect to China, including the possibility of imposing greater restrictions on international trade and significant increases in tariffs on goods imported into the United States. Recently, the United States has increased tariffs on certain goods imported into the United States from China, following which the Chinese government increased tariffs on certain goods imported into China from the United States, in response to which the United States announced plans to impose additional tariffs. There is a risk of further escalation and retaliatory actions between the two countries. In addition, the current administration, certain members of Congress and federal officials have stated that United States may seek to implement more protective trade measures, not just with respect to China but with respect to other countries in the Asia Pacific region as well. Any increased trade barriers or restrictions on global trade, especially trade with China, could adversely impact our business and financial statements.
ITEM 6. EXHIBITS
 
 
 
Exhibit
Number    
  
Description
2.1
 
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
4.1
 
 
 
 
10.1
 
 
 
 

39

12.1
  
 
 
31.1
  
 
 
31.2
  
 
 
32.1
  
 
 
32.2
  
 
 
101.INS
  
XBRL Instance Document* - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document*
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document*
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document*
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document*
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document*
*
Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Condensed Balance Sheets as of June 29, 2018 and December 31, 2017, (ii) Consolidated Condensed Statements of Earnings for the three and six months ended June 29, 2018 and June 30, 2017, (iii) Consolidated Condensed Statements of Comprehensive Income for the three and six months ended June 29, 2018 and June 30, 2017, (iv) Consolidated Condensed Statement of Changes in Equity for the six months ended June 29, 2018, (v) Consolidated Condensed Statements of Cash Flows for the six months ended June 29, 2018 and June 30, 2017, and (vi) Notes to Consolidated Condensed Financial Statements.
The registrant agrees to furnish to the Commission supplementally upon request a copy of schedules or exhibits omitted pursuant to Item 601(b)(2) of Regulation S-K of any material plan or acquisition, disposition or reorganization set forth above.

40

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: July 26, 2018
By:
/s/ Charles E. McLaughlin
 
 
Charles E. McLaughlin
 
 
Senior Vice President and Chief Financial Officer
 
 
 
Date: July 26, 2018
By:
/s/ Emily A. Weaver
 
 
Emily A. Weaver
 
 
Chief Accounting Officer
 
 
 

41

Fortive Corp Reports