Fortive Corp (FTV) FY 2022 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Fortive Corporation (the “Company,” “Fortive,” “we,” “our,” and “us”) is a provider of essential technologies for connected workflow solutions across a range of attractive end-markets. Our strategic segments - Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions - include well-known brands with leading positions in their markets. Our businesses design, develop, manufacture, and service professional and engineered products, software, and services, building upon leading brand names, innovative technologies, and significant market positions. We are headquartered in Everett, Washington and employ a team of more than 18,000 research and development, manufacturing, sales, distribution, service, and administrative employees in more than 50 countries around the world.

This MD&A is designed to provide a reader of our financial statements with a narrative from the perspective of management. Our MD&A is divided into seven sections:

•Basis of Presentation

•Overview

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•Results of Operations

•Financial Instruments and Risk Management

•Liquidity and Capital Resources

•Critical Accounting Estimates

•New Accounting Standards

BASIS OF PRESENTATION

On October 9, 2020, we completed the separation of Vontier Corporation (“Vontier”), the entity we created to hold our former Industrial Technologies segment (the “Separation”). The accounting requirements for reporting the Vontier business as a discontinued operation were met when the Separation was completed. Accordingly, the consolidated financial statements reflect the results of the Vontier business as a discontinued operation for all periods presented.

OVERVIEW

General

Fortive is a multinational business with global operations with approximately 46% of our sales derived from customers outside the United States in 2022. As a company with global operations, 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 products, software, and services we offer, typically help limit the impact of any one industry or the economy of any single country (except for the United States) on our operating results. Given the broad range of products manufactured, software and services provided, and geographies served, we do not use any indices other than general economic trends to predict the overall outlook for the Company. Our individual businesses monitor key competitors and customers, including their sales, to the extent possible, to gauge relative performance and the outlook for the future.

As a result of our geographic and industry diversity, we face a variety of opportunities and challenges, including technological development in most of the markets we serve, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force, and consolidation of our competitors. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which include Eastern Europe, the Middle East, Africa, Latin America, and Asia with the exception of Japan and Australia. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend, in particular, on our ability to expand our business across geographies and market segments, identify, consummate, and integrate appropriate acquisitions, develop innovative and differentiated new products, services, and software, expand and improve the effectiveness of our sales force, continue to reduce costs and improve operating efficiency and quality, attract relevant talent and retain, grow, and empower our talented workforce, and effectively address the demands of an increasingly regulated environment. We are making significant investments, organically and through acquisitions, to address technological change in the markets we serve and to improve our manufacturing, research and development, and customer-facing resources in order to be responsive to our customers throughout the world.

Russia Ukraine Conflict

In February 2022, Russian forces invaded Ukraine (“Russia Ukraine Conflict”) resulting in broad economic sanctions being imposed on Russia. In the second quarter of 2022, the Company exited business operations in Russia, other than for ASP’s sterilization products, which are exempt from international sanctions as humanitarian products. Our business in Russia and Ukraine accounted for less than 1.0% of total revenue and less than 0.2% of total assets for the year ended December 31, 2021. During the year ended December 31, 2022, the Company recorded pre-tax charges of $17.9 million, primarily relating to the write-off of net assets, the write-off of the cumulative translation adjustment in earnings for legal entities deemed substantially liquidated, and to record provisions for employee severance and legal contingencies. These costs are identified as the “Russia exit and wind down costs” in the Consolidated Statements of Earnings. Substantially all related liabilities were paid and settled during the year ended December 31, 2022.

Non-GAAP Measures

In this report, references to sales from existing businesses refer 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 and the effect of purchase accounting

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adjustments, 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 performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisition and divestiture related items because the nature, size, and number of such transactions can vary dramatically from period to period and between us and our peers. We exclude the effect of currency translation from 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 from existing businesses refer to the impact of both price and unit sales.

Business Performance and Outlook

Business Performance

We experienced robust demand for our products and service during 2022 and despite challenging macroeconomic conditions and global supply chain constraints, aggregate year-over-year sales increased 10.9%, with contributions from both existing and newly acquired businesses, all partially offset by unfavorable changes in foreign exchange rates. Year-over-year sales from existing businesses increased 10.1%, reflecting strong end-market demand for our offerings as well as focused execution on product and service delivery, and favorable pricing.

Geographically, year-over-year sales from existing businesses in developed markets increased low double-digits, with low double-digit growth in both North America and Western Europe, respectively. Year-over-year sales from existing businesses in high growth markets increased low double-digits driven by low twenties growth in Latin America and low double-digit growth in China.

In addition to increased demand, year-over-year price increases contributed 5.2% to sales growth during 2022, as compared to 2021, and is reflected as a component of the change in sales from existing businesses. During 2022, price increases exceeded inflationary increases that we experienced on purchased materials.

The strengthening of the U.S. dollar relative to other currencies reduced our sales by 3.1% during 2022, as compared to 2021 and may continue to impact our results in future periods.

Widespread supply chain challenges and inflationary pressures persisted throughout the year resulting in higher costs in each of our three segments. We continue to apply FBS to help mitigate the impact of these challenges and to serve our customers. The COVID-19 pandemic, including the mitigation efforts and the accelerated spread of the virus in China, continues to adversely impact our results and creates operating challenges with logistics, material availability and absenteeism. We anticipate that the disruptions caused by the pandemic will continue to impact future periods.

2023 Outlook

Despite an evolving macro environment and continued geopolitical conflict, we anticipate increasing demand for our offerings will continue and are projecting full year sales to grow on a year-over-year basis by approximately 2.0%-4.5% with year-over-year growth from existing businesses of approximately 3.0%-5.5%. We expect that foreign exchange rates will remain volatile in 2023 and could create unfavorable results relative to foreign exchange rates in 2022. Additionally, this outlook is subject to various assumptions and risks, including but not limited to the resilience and durability of the economies of the United States and other critical regions, ongoing challenges with global logistics and supply chains including the availability of electronic components, inflationary pressures, the impact of the COVID-19 pandemic, the impact of the Russia Ukraine Conflict, market conditions in key end product segments, elective surgery rates, and the impact of energy disruption in Europe. We will continue to deploy FBS to actively manage production challenges, collaborate with customers and suppliers to minimize disruptions and utilize price increases and other countermeasures to offset inflationary pressures. In addition, we expect to execute discrete restructuring plans as well as our general, cost-saving measures to prepare for, and respond to, any material adverse global economic trends that may develop.

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We continue to monitor the macroeconomic and geopolitical conditions which may impact our business, including spread of the COVID-19 virus, continued geopolitical conflict, global inflation, potential adverse global economic trends and sentiments, monetary and fiscal policies, international trade and relations between the U.S., China and other nations, and investment and taxation policy initiatives being considered in the United States and by the Organization for Economic Co-operation and Development (“OECD”).

Acquisitions and Divestitures

2022

Therapy Physics Divestiture

On September 30, 2022, we completed the sale of our Therapy Physics product line, which was reported in our Advanced Healthcare Solutions segment, to an unrelated third party for cash consideration of $9.6 million. As a result of the sale, during the year ended December 31, 2022, we recorded a net realized pre-tax gain totaling $0.5 million, net of transaction costs, which is recorded as “Other non-operating expense, net” in the Consolidated Statements of Earnings. The divested business accounted for less than 1.0% of total revenue and less than 0.3% of total assets for the year ended December 31, 2021. The divestiture of this product line did not represent a strategic shift with a major effect on the Company’s operations and financial results and therefore the divested product line is not reported as a discontinued operation.

2021

ServiceChannel Acquisition

On August 24, 2021, we acquired ServiceChannel Holdings, Inc. (“ServiceChannel”), a privately held, global provider of SaaS based multi-site facilities maintenance service solutions with an integrated service-provider network. The acquisition of ServiceChannel broadens our offering of software-enabled solutions for the facility and asset lifecycle workflow. The total consideration paid was approximately $1.2 billion, net of acquired cash, and includes approximately $28 million of deferred compensation consideration was being recognized ratably over a twelve-month service period. The ServiceChannel acquisition was primarily financed with available cash and proceeds from our financing activities. We recorded approximately $868 million of goodwill related to the ServiceChannel acquisition, which is not tax deductible. ServiceChannel had revenue in 2020 of approximately $70 million and is an operating company within our Intelligent Operating Solutions segment.

Provation Acquisition

On December 27, 2021, we acquired Provation Software, Inc. (“Provation”), a leading provider of clinical workflow software solutions used in hospitals and ambulatory surgery centers. The acquisition of Provation extends our digital offering and software capabilities in the healthcare space. The total consideration paid was approximately $1.4 billion, net of acquired cash and was primarily financed with proceeds from our financing activities and available cash. We recorded $972 million of goodwill related to the acquisition, which is not tax deductible. Provation had revenue in 2020 of approximately $90 million and is an operating company within our Advanced Healthcare Solutions segment.

2020

Vontier Separation

On October 9, 2020, we completed the Separation by distributing 80.1% of the outstanding shares of Vontier to our stockholders on a pro rata basis. To effect the Separation, we distributed to our stockholders two shares of Vontier common stock for every five shares of Fortive common stock outstanding held on September 25, 2020, the record date for the distribution, and retained 19.9% of the shares of Vontier common stock immediately following the Separation. The accounting requirements for reporting the Separation of Vontier as a discontinued operation were met when the Separation was completed.

On September 29, 2020, Vontier entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks, consisting of a three-year, $800 million senior unsecured delayed draw term loan facility (the “Three-Year Term Loans”), a two-year, $1 billion senior unsecured delayed draw term loan facility (the “Two-Year Term Loans” and together with the “Three-Year Term Loans”, the “Term Loans”) and a three-year, $750 million senior unsecured multi-currency revolving credit facility (the “Revolving Credit Facility” and, together with the Term Loans, the “Credit Facilities”). On the Distribution Date, Vontier drew down the full $1.8 billion available under the Term Loans. Vontier used the proceeds from the Term Loans to make payments to the Company, with $1.6 billion used as part of the consideration for the contribution of certain assets and liabilities to Vontier by the Company in connection with the Separation and $202 million used as an adjustment for excess cash balances remaining with Vontier (collectively, the “Cash Consideration”). We applied the Cash Consideration to repay certain outstanding indebtedness, interest on certain debt instruments, and to pay certain of the Company’s regular, quarterly cash dividends. Refer to Note 11 to the consolidated financial statements for the description of the debt repayments made.

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On January 19, 2021, we completed the Debt-for-Equity Exchange of 33.5 million shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co., including (i) all $400.0 million of the Term Loan due March 2021 and (ii) $683.2 million of the Term Loan due May 2021. We recorded a loss on extinguishment of the debt included in the Debt-for-Equity Exchange of $94.4 million in the year ended December 31, 2021. Additionally, during the first quarter of 2021 we recognized a gain of $57.0 million related to the subsequent change in the fair value of the Retained Vontier Shares.

In preparation for and executing the Separation, the Company incurred $84 million and $35 million in Vontier stand-up and separation-related transaction costs during the years ended December 31, 2020 and 2019, respectively, which have been reclassified to discontinued operations in the accompanying consolidated financial statements. These stand-up and separation-related costs primarily relate to professional and advisory fees associated with preparation of regulatory filings and separation activities within finance, tax, legal, and information system functions.

In connection with the Separation, Fortive and Vontier entered into various agreements to effect the Separation and provide a framework for Vontier’s relationship with Fortive after the Separation, including a transition services agreement, an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, a FBS license agreement, and a stockholder’s and registration rights agreement. These agreements govern the separation between Fortive and Vontier of the assets, employees, liabilities, and obligations (including its investments, property, and employee benefits and tax-related assets and liabilities) of Fortive and its subsidiaries attributable to periods prior to, at, and after Vontier’s separation, and also govern certain relationships between Fortive and Vontier after the Separation. As of December 31, 2021, all responsibilities and obligations under all agreements have been materially settled.

Other Acquisition-related Matters

On April 1, 2019 (the “Principal Closing Date”), we acquired the advanced sterilization products business (“ASP”) of Johnson & Johnson, a New Jersey corporation. Prior to our acquisition of ASP, Johnson & Johnson received a Civil Investigative Demand from the United States Department of Justice (“DOJ”) regarding a False Claims Act investigation arising from a whistleblower lawsuit pertaining to the pricing, quality, marketing, and promotion of certain of ASP’s products. Based on the totality of available information at the Principal Closing Date and throughout the applicable measurement period, management allocated $26 million of the $2.7 billion purchase price to a potential liability related to the aforementioned litigation. Following the Principal Closing Date, management continually evaluated the likelihood and magnitude of the asserted claims based on any new information that became available. In the second quarter of 2021, following the unsealing of the whistleblower lawsuit and DOJ’s declination to intervene in the litigation, the plaintiff dismissed the whistleblower lawsuit. Based on these developments, management derecognized the litigation liability from our Consolidated Balance Sheet and recorded a Gain on litigation resolution of $26 million within Non-operating income (expense), net in our Consolidated Statements of Earnings during the year ended December 31, 2021.

During 2019, we acquired Censis Technologies (“Censis”). At the closing date of the purchase of Censis, a contractual liability existed which management allocated to the purchase price and was recorded in our Consolidated Balance Sheet. During the fourth quarter of 2021, that liability was discharged for an amount less than the amount allocated, and the excess was recorded as a Gain on litigation resolution of $3.9 million within Non-operating income (expense), net in our Consolidated Statements of Earnings during the year ended December 31, 2021.

RESULTS OF OPERATIONS

Components of Sales Growth

Refer to Intelligent Operating Solutions, Precision Technologies and Advanced Healthcare Solutions sections below for further discussion of year-over-year sales growth.

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Operating Profit Margins

2022 vs. 2021

Operating profit margins were 16.9% for the year ended December 31, 2022, an increase of 140 basis points as compared to 15.5% in 2021 with year-over-year operating profit margin comparisons impacted by:

•Year-over-year increase in price and sales volumes from existing businesses and gains from productivity measures, which were partially offset by higher year-over-year employee compensation, freight, logistics and material costs and unfavorable foreign exchange rates — favorable 120 basis points

•The year-over-year effect of amortization from existing businesses — favorable 65 basis points

•The year-over-year net effect of acquisition-related transaction costs which were lower during 2022 — favorable 65 basis points

•The year-over-year net effect of acquired businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 100 basis points

•The year-over-year effect of significant restructuring costs which were lower during 2022 — favorable 20 basis points

•Russia exit and wind down costs that were incurred during 2022 — unfavorable 30 basis points

2021 vs. 2020

Operating profit margins were 15.5% for the year ended December 31, 2021, an increase of 390 basis points as compared to 11.6% in 2020 with year-over-year operating profit margin comparisons impacted by:

•Higher year-over-year sales volumes and price increases from existing businesses, incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives and favorable sales mix, which were partially offset by higher year-over-year freight and logistics costs, employee compensation and SG&A costs, which were reduced in 2020 to better align costs with demand in response to the pandemic — favorable 240 basis points

•The year-over-year net effect of acquisition-related transaction costs which were less in the year ended December 31, 2021 than those recognized in the comparable period in 2020 — favorable 40 basis points

•The year-over-year effect of amortization from existing businesses — favorable 85 basis points

•The year-over-year effects of restructuring costs which were less in 2021 than those recognized in 2020 — favorable 35 basis points

•The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were higher in 2021 than those recognized in 2020 — unfavorable 10 basis points

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Business Segments and Geographic Area Results

Sales by business segment and geographic area for the year ended December 31 are as follows ($ in millions):

INTELLIGENT OPERATING SOLUTIONS

Our Intelligent Operating Solutions segment provides advanced instrumentation, software and services to tens of thousands of customers enabling their mission-critical workflows. These offerings include electrical test & measurement, facility and asset lifecycle software applications, connected worker safety and compliance solutions across a range of vertical end markets, including manufacturing, process industries, healthcare, utilities and power, communications and electronics, among others.

Intelligent Operating Solutions Selected Financial Data

Components of Sales Growth

2022 COMPARED TO 2021

Year-over-year sales from existing businesses increased 12.0% in 2022, as compared to 2021. The year-over-year increase was driven by price increases and continued strong demand for test and measurement instrumentation, gas detection offerings, and software and related services.

Geographically, sales from existing businesses in developed markets increased by low double-digits during 2022, driven by mid-teens growth in Western Europe and low double-digit growth in North America. Sales in high growth markets increased by low double-digits during 2022, driven by high single-digits growth in China, low twenties growth in Latin America, and mid-teens growth in Other Asia.

Year-over-year price increases in our Intelligent Operating Solutions segment contributed 5.8% to sales growth in 2022, as compared to 2021, and is reflected as a component of the change in sales from existing businesses.

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Operating profit margin increased 230 basis points during 2022 as compared to 2021 with year-over-year operating profit margin comparisons impacted by:

•Year-over-year increase in price and sales volume from existing businesses and gains from productivity measures, partially offset by higher year-over-year freight, logistics and material costs and employee compensation costs, and growth investments in R&D, sales and marketing and unfavorable foreign exchange rates — favorable 230 basis points

•The year-over-year effect of amortization from existing businesses — favorable 90 basis points

•The year-over-year effect of acquisition-related transaction costs which were lower in 2022 than those recognized in 2021 — favorable 70 basis points

•The year-over-year effect of acquired businesses, including amortization — unfavorable 190 basis points

•The year-over-year effect of significant restructuring costs which were less in 2022 than those recognized in 2021 — favorable 30 basis points

2021 COMPARED TO 2020

Year-over-year sales from existing businesses increased 10.7% in 2021, as compared to 2020. The year-over-year increase was driven by broad-based increases in demand, particularly from our industrial channel partners, critical safety, facilities, and maintenance SaaS product offerings, and portable gas detection instruments, which were partially offset by a decrease in demand for our industrial imaging products, as demand for those products was elevated during the comparable period in 2020 for COVID-19 monitoring.

Geographically, demand from existing businesses in our Intelligent Operating Solutions segment increased in both developed and high growth markets during 2021, driven by growth in every major geography and led by North America, Europe, China and Latin America.

Year-over-year price increases in our Intelligent Operating Solutions segment contributed 2.0% to sales growth in 2021, as compared to 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 190 basis points during 2021 as compared to 2020, with year-over-year operating profit margin comparisons impacted by:

•Higher year-over-year sales volumes from existing businesses, price increases, a favorable sales mix, cost savings associated with restructuring and productivity improvement initiatives, which were partially offset by higher year-over-year employee compensation and SG&A costs due to broad cost reduction efforts in 2020 that reduced expenses to better align with reductions in demand, and increased investment in key growth and innovation initiatives — favorable 290 basis points

•The year-over-year effect of amortization from existing businesses — favorable 105 basis points

•The year-over-year effect of restructuring actions which were less in 2021 than those recognized in 2020 — favorable 45 basis points

•The year-over-year effect of acquisition-related transaction costs which were higher in 2021 than those recognized in 2020 — unfavorable 135 basis points

•The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue — unfavorable 110 basis points

PRECISION TECHNOLOGIES

Our Precision Technologies segment helps solve tough technical challenges to speed breakthroughs in a wide range of applications, from food and beverage production and manufacturing to next-generation electric vehicles and clean energy, as our customers seek new test solutions to enable the electrification and connectivity of everything. Our expertise in materials, methods and measurements are reflected in our electrical test & measurement, sensing and material technologies offered to a broad set of customers and vertical end markets, including industrial, power and energy, automotive, medical equipment, food and beverage, aerospace and defense, semiconductor, and other general industries.

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Precision Technologies Selected Financial Data

Components of Sales Growth

2022 COMPARED TO 2021

Year-over-year sales from existing businesses increased 13.2% in 2022. The year-over-year results were driven by price increases, market growth and share gains in key verticals and improved production execution with our energetic materials products.

Geographically, sales from existing businesses in developed markets increased by low double-digits during 2022 driven by low double-digits growth in North America and mid-teens growth in Western Europe. Sales in high growth markets increased by high teens during 2022 driven by low twenties growth in China.

Year-over-year price increases in our Precision Technologies segment contributed 7.0% to sales growth during 2022 as compared to 2021, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 200 basis points during 2022 as compared to 2021 with year-over-year operating profit margin comparisons impacted by:

•Higher year-over-year increases in price and volume, partially offset by higher material, freight and employee compensation costs and unfavorable exchange rates — favorable 170 basis points

•The year-over-year effect of amortization from existing businesses — favorable 20 basis points

•The year-over-year effect of significant restructuring costs which were less in 2022 than those recognized in 2021 — favorable 10 basis points

2021 COMPARED TO 2020

Year-over-year sales from existing businesses increased 10.6% in 2021. The year-over-year results were driven by broad-based demand for test and measurement instruments, increased demand for sensing technologies in the industrial and semiconductor end markets, and increased demand for energetic materials, which were partially offset by a decrease in demand in the medical end market for sensing devices that supported COVID-19 patient treatment efforts in the comparable periods of 2020.

Geographically, demand from existing businesses in our Precision Technologies segment increased during 2021 in both developed and high growth markets, with the results driven by growth in every major geography, led by North America, Asia, and Europe.

Year-over-year price increases in our Precision Technologies segment contributed 2.0% to sales growth during 2021, as compared to 2020, and is reflected as a component of the change in sales from existing businesses.

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Operating profit margin increased 260 basis points during 2021 as compared to 2020 with year-over-year operating profit margin comparisons impacted by:

•Higher year-over-year sales volumes from existing businesses, price increases, and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives which were partially offset by higher year-over-year employee compensation costs and spending levels, which were reduced in 2020 in response to the COVID-19 pandemic, and an unfavorable sales mix — favorable 200 basis points

•The year-over-year effect of amortization from existing businesses — favorable 15 basis points

•The year-over-year effect of restructuring actions which were less in 2021 than those recognized in 2020 — favorable 45 basis points

ADVANCED HEALTHCARE SOLUTIONS

Our Advanced Healthcare Solutions segment supplies critical workflow solutions enabling healthcare providers to deliver exceptional patient care more efficiently. Our offerings include instrument sterilization solutions, instrument tracking, cell therapy equipment design and manufacturing, biomedical test tools, radiation detection and safety monitoring, and end-to-end clinical productivity software and solutions. Our healthcare offerings help ensure critical safety standards are met, instruments and operating rooms are working at peak performance, and complex procedures are followed accurately in these mission-critical healthcare environments.

Advanced Healthcare Solutions Selected Financial Data

Components of Sales Growth

2022 COMPARED TO 2021

Year-over-year sales from existing businesses increased 2.1% during 2022, primarily driven by price increases and a slight increase in volume on increased demand for sterilization products and radiation monitoring, partially offset by declines in design services, hardware offerings and quality assurance equipment.

Geographically, sales from existing businesses in developed markets increased by low single-digits during 2022 driven by low single-digit growth in North America and a slight increase in Western Europe. In high growth markets, sales growth from existing businesses was down slightly, with mid-single-digits decline in China and high teens decline in Middle East and Africa, offset by low twenties growth in Latin America.

Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 1.7% to sales growth during 2022, as compared to 2021, and is reflected as a component of the change in sales from existing businesses.

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Operating profit margin remained flat during 2022 as compared to 2021 with year-over-year operating profit margin comparisons impacted by:

•Year-over-year sales increases in price and volume from existing businesses were more than offset by increasing freight, logistics and employee compensation costs, reserves for uncollectible receivables and unfavorable foreign exchange rates — unfavorable 170 basis points

•The year-over-year effect of amortization from existing businesses — favorable 75 basis points

•The year-over-year net effect of acquisition-related transaction costs which were less than those recognized in the comparable period in 2021 — favorable 175 basis points

•The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to inventory which were more in 2022 than those recognized in 2021 — unfavorable 110 basis points

•The year-over-year effect of significant restructuring costs which were less in 2022 than those recognized in 2021 — favorable 30 basis points

2021 COMPARED TO 2020

Year-over-year sales from existing businesses increased 6.0% during 2021, driven by increased demand for sterilization capital equipment and consumables, radiation safety monitoring, cell therapy equipment design and manufacturing, and surgical instrument tracking SaaS products.

Geographically, demand from existing businesses in Advanced Healthcare Solutions increased in both developed and high growth markets during 2021, driven by growth in North America and Asia, which was partially offset by declines in Europe on non-recurring diagnostic equipment design services performed in 2020 and associated with COVID-19 pandemic response.

Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 1.2% to sales growth during 2021, as compared to 2020, and is reflected as a component of the change in sales from existing businesses.

Operating profit margin increased 800 basis points during 2021 as compared to 2020 with year-over-year operating profit margin comparisons impacted by:

•Higher year-over-year sales volumes from existing businesses, a favorable sales mix and materials performance, price increases, which were partially offset by higher year-over-year freight and logistics costs and higher year-over-year employee compensation costs — favorable 140 basis points

•The year-over-year effect of lower acquisition-related transaction and integration costs, including those incurred to establish ASP's organization and enable operating productivity — favorable 400 basis points

•The year-over-year effect of amortization from existing businesses — favorable 140 basis points

•The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments to deferred revenue and inventory which were less in 2021 than those recognized in 2020 — favorable 120 basis points

•The year-over-year effect of restructuring actions which were less in 2021 than those recognized in 2020 — favorable 10 basis points

COST OF SALES AND GROSS PROFIT

The year-over-year increase in gross profit during 2022 as compared to 2021, is due primarily to a year-over-year increase in sales volumes and price increases from existing and newly acquired business, which were partially offset by higher material, freight and employee compensation costs and the unfavorable impact of foreign currency exchange rates.

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The year-over-year increase in gross profit during 2021 as compared to 2020 is due primarily to higher year-over-year sales volumes from existing businesses, sales volumes from our recent acquisitions, price increases, favorable sales mix, lower operating costs and gains from productivity improvements, all of which were partially offset by changes in foreign currency exchange rates and higher material, freight, and logistics costs.

OPERATING EXPENSES

SG&A increased during 2022 as compared to 2021 due to higher intangible amortization and incremental expenses from our recent acquisitions and increased employee compensation expenses, customer acquisition and marketing costs, partially offset by the impact of changes in currency exchange rates.

On a year-over-year basis, SG&A represented as a percentage of sales decreased 140 basis points. During 2022 we incurred higher amortization expense from our recent acquisitions, which was more than offset by leverage on SG&A costs, which grew at a slower rate than our sales.

SG&A expenses increased during 2021 as compared to 2020 due to higher intangible amortization and incremental expenses from our recent acquisitions, higher employee compensation costs and SG&A expenses at our existing businesses due to broad cost reduction efforts executed in 2020 to better align with reductions in demand, and the impact of changes in foreign currency exchange rates, all of which was partially offset by reductions in net acquisition-related costs and incremental savings associated with restructuring and productivity improvement initiatives. On a year-over-year basis, SG&A expenses declined by 270 basis points, as a percentage of revenue, when compared to 2020, reflecting that demand for our products and services grew at a faster rate than expenses.

R&D expenses, consisting principally of internal and contract engineering personnel costs, increased during 2022 as compared to 2021 due to incremental costs from our recent acquisitions, investments made in innovation and key initiatives and higher employee compensation costs. On a year-over-year basis, R&D expenses as a percentage of sales increased 10 basis points in 2022 as compared to 2021, on our recent acquisitions, where R&D spending is higher as a percentage of sales than in existing businesses and leverage on R&D costs, which grew at a slower rate than our sales.

R&D expenses, consisting principally of internal and contract engineering personnel costs, increased during 2021 as compared to 2020 due to targeted investments in key growth initiatives and innovation. On a year-over-year basis, R&D expenses as a percentage of sales decreased 10 basis points in 2021 as compared to 2020, reflecting demand for our products and services that grew at a faster rate than our investments in key growth initiatives and innovation.

RUSSIA EXIT AND WIND DOWN COSTS

We incurred pre-tax costs totaling $17.9 million in 2022, primarily in the second quarter, for the derecognition of net assets, the cumulative translation adjustment for legal entities deemed substantially liquidated, and to record provisions for employee severance and legal contingencies. Of the $17.9 million incurred, approximately $9.2 million represents non-cash charges and is reflected as such in the Consolidated Statement of Cash Flows. The costs were primarily related to our segments, as follows: Intelligent Operating Solutions $14.4 million, Precision Technologies $2.2 million and Advanced Healthcare Solutions $1.3 million.

INTEREST COSTS

For a discussion of our outstanding indebtedness, refer to Note 11 to the accompanying consolidated financial statements.

Interest expense, net of $98.3 million was recorded during 2022 compared to $103.2 million during 2021 and $148.5 million during 2020. Year-over-year interest expense decreased in 2022 due to lower year-over-year effective interest rates on debt instruments, despite overall higher debt balances and rising interest rates. This decrease was primarily driven by lower non-cash interest expense on the Convertible Senior Notes when compared to 2021, given the notes were settled in the first quarter of

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2022. Year-over-year interest expense decreased in 2021 due to changes in year-over-year average debt balances. In the event that additional liquidity is required, particularly in connection with acquisitions, we may enter into additional borrowings under our commercial paper programs or credit facilities, and/or access the capital markets. If we enter into such additional financing transactions, the amount of annual interest expense will increase.

UNREALIZED GAIN ON INVESTMENT IN VONTIER CORPORATION

On October 9, 2020, we completed the Vontier separation and retained 19.9% of the shares of Vontier common stock immediately following the Separation. We did not retain a controlling interest in Vontier and therefore the subsequent fair value changes of the Retained Vontier Shares are included in our results from continuing operations. At December 31, 2020, the Retained Vontier Shares were remeasured at fair value based on Vontier’s closing stock price, with unrealized gains of $1.1 billion recorded in the Consolidated Statement of Earnings.

On January 19, 2021, we completed an exchange of all of the Retained Vontier Shares as part of a noncash debt-for-equity exchange that reduced outstanding indebtedness of Fortive by $1.1 billion.

INCOME TAXES

General

Income tax expense and deferred tax assets and liabilities reflect management’s assessment of future taxes expected to be paid on items reflected in our financial statements. We record the tax effect of discrete items and items that are reported net of their tax effects in the period in which they occur.

Our effective tax rate can be affected by, among others, changes in the mix of earnings in countries with differing statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, accruals related to contingent tax liabilities and period-to-period changes in such accruals, the results of audits and examinations of previously filed tax returns (as discussed below), the expiration of statutes of limitations, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities, and changes in tax laws.

The amount of income taxes we pay is subject to audit by federal, state, and foreign tax authorities, which may result in proposed assessments. The Company is subject to examination in the United States, various states and foreign jurisdiction for the tax years 2010 to 2022. These examinations include filings of tax returns prior to our separation from Danaher, tax returns of enterprises no longer in our portfolio, and tax returns for pre-acquisition periods of enterprises added to our portfolio. Significant obligations are detailed in our tax matters agreements in connection with the separation of Fortive from Danaher on July 1, 2016, the split-off of the Automation and Specialty business on October 1, 2018, and the Vontier separation on October 9, 2020. We review our global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions, and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary.

We conduct business globally, and, as part of our global business, we file numerous income tax returns in the U.S. federal, state, and foreign jurisdictions. Our ability to obtain a tax benefit in certain countries that continue to have lower statutory tax rates than the United States is dependent on our levels of taxable income in such foreign countries. We believe that a change in the statutory tax rate of any individual foreign country would not typically have a material effect on our financial statements given the geographic dispersion of our taxable income.

Changes by the U.S. in relation to international tax reform could increase uncertainty and may adversely affect our income tax provision, cash taxes paid, and effective tax rate. Comprehensive tax reform was enacted under the TCJA which includes numerous provisions that affect businesses and introduces changes that impact U.S. corporate tax rates, business-related exclusions, deductions, and credits. The taxing authorities continue to issue regulations and guidance, some with retrospective application, to the provisions of the TCJA and we expect this to continue for the foreseeable future. Any future adjustments resulting from retrospective regulations and guidance issued will be considered as discrete income tax expense or benefit in the interim period the guidance is issued.

Furthermore, changes in multilateral agreements and the tax laws of foreign jurisdictions could arise as a result of the base erosion and profit shifting project undertaken by the OECD and could significantly increase our tax provision, cash taxes paid, and effective tax rate. The OECD has issued significant global tax policy changes that include both expanded reporting as well as technical global tax policy changes and many countries in which we operate have implemented tax law and administrative changes to align with new OECD policies. The Company will continue to monitor and evaluate the impact of OECD policy changes.

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On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other provisions, implements a 15% corporate alternative minimum tax on book income on corporations whose average annual adjusted financial statement income during the most recently-completed three-year period exceeds $1.0 billion. This provision is effective for tax years beginning after December 31, 2022. Based upon our analysis of the Inflation Reduction Act of 2022 and subsequently released guidance, we do not believe the corporate alternative minimum tax will have a material impact on our financial statements.

For a discussion of risks related to these and other tax matters, please refer to “Item 1A. Risk Factors.”

Comparison of the Years Ended December 31, 2022, 2021, and 2020

Our effective tax rate for the years ended December 31, 2022, 2021, and 2020 was 13.5%, 9.3% and 3.7%, respectively.

Our effective tax rate for 2022 differs from the U.S. federal statutory rate of 21% due primarily to the positive and negative effects of the TCJA, U.S. federal permanent differences, the impacts of credits and deductions provided by law, including those associated with state income taxes, an increase to in our uncertain tax positions relating to higher interest rates, and the effect of Russia exit and wind down costs for which no tax benefit was recognized.

Our effective tax rate for 2021 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the TCJA, U.S. federal permanent differences, the impact of credits and deductions provided by law, earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, and a permanent difference on the realized gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange that was completed on January 19, 2021. The Debt-for-Equity Exchange included an exchange of all of our Vontier common stock owned as of December 31, 2020.

Our effective tax rate for 2020 differs from the U.S. federal statutory rate of 21% due primarily to the effect of the TCJA U.S. federal permanent differences, the impact of credits and deductions provided by law, earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate, offset by tax costs associated with repatriating a portion of our previously reinvested earnings outside of the United States, and a permanent difference on the unrealized gain on our Retained Vontier Shares due to the tax-free treatment of our disposition of the shares through the Debt-for-Equity Exchange that was completed on January 19, 2021. The Debt-for-Equity Exchange included an exchange of all of our Vontier common stock owned as of December 31, 2020.

COMPREHENSIVE INCOME

Comprehensive income increased by $50 million in 2022 as compared to 2021, primarily due to an increase in net income of $147 million and favorable changes in pension benefit adjustments of $13 million, partially offset by unfavorable changes in foreign currency translation adjustments of $110 million.

Comprehensive income decreased by $1.1 billion in 2021 as compared to 2020, due to a decrease in net earnings of $1.0 billion, including both continuing and discontinued operations, unfavorable changes in foreign currency translation adjustments of $132 million, and favorable changes in pension benefit adjustments of $38 million. The decrease in net earnings was due to the recognition of a $1.1 billion unrealized gain on the Retained Vontier Shares in 2020.

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

We are exposed to market risk from changes in interest rates, foreign currency exchange rates, credit risk and commodity prices, each of which could impact our financial statements. We generally address our exposure to these risks through our normal operating and financing activities. In addition, our broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on our operating profit as a whole.

Interest Rate Risk

We manage interest cost using a mixture of fixed-rate and variable-rate debt. A change in interest rates on long-term debt impacts the fair value of our fixed-rate long-term debt but not our earnings or cash flows because the interest on such debt is fixed. Generally, the fair market value of fixed-rate debt will increase as interest rates fall and decrease as interest rates rise. As of December 31, 2022, an increase of 100 basis points in interest rates would have decreased the fair value of our fixed-rate long-term debt by approximately $79 million.

As of December 31, 2022, our variable-rate debt obligations consist of U.S. dollar denominated commercial paper, U.S. dollar denominated delay-draw term loan, and senior unsecured term facilities denominated in either Euros or Japanese Yen (refer to Note 11 to the consolidated financial statements for information regarding our outstanding indebtedness as of December 31, 2022). As a result, our primary interest rate exposure results from changes in short-term interest rates. As these shorter duration

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obligations mature, we anticipate issuing additional short-term commercial paper obligations and/or term loans to refinance all or part of these borrowings. The annual effective rate associated with our outstanding variable-rate obligation was approximately 2.04% with interest expense of $44.9 million. On an annualized basis, a hypothetical 10 basis points increase in market interest rates as of December 31, 2022 on our variable-rate debt obligations as of December 31, 2022 would have increased our interest expense by $1.8 million in 2022.

Foreign Currency Exchange Rate Risk

We face transactional exchange rate risk from transactions with customers in countries outside of the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than our functional currency or the functional currency of an applicable subsidiary. We also face translational exchange rate risk related to the translation of financial statements of our foreign operations into U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. The effect of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the accumulated other comprehensive income (loss) component of equity. A 10% depreciation in major currencies relative to the U.S. dollar as of December 31, 2022 would have resulted in a reduction of foreign currency-denominated net assets and stockholders’ equity of approximately $181 million.

During the second quarter of 2022, we designated our ¥14.4 billion Yen-denominated variable interest rate term loan and our €275 million Euro-denominated variable interest rate term loan outstanding as net investment hedges of our investment in certain foreign operations. Accordingly, foreign currency transaction gains or losses on the debt were deferred in the foreign currency translation component of Accumulated other comprehensive income (loss) (“AOCI”) as an offset to the foreign currency translation adjustments on our investments in foreign subsidiaries. In 2022, we recognized after-tax losses of $5.1 million in Other comprehensive income (loss) related to the net investment hedges.

Currency exchange rates unfavorably impacted 2022 reported sales by 3.1% as compared to 2021, as the U.S. dollar was, on average, stronger against most major currencies during 2022 as compared to exchange rate levels during 2021. If the exchange rates in effect as of December 31, 2022 were to prevail throughout 2023, currency exchange rates would negatively impact 2023 estimated sales by approximately 0.3% relative to our performance in 2022. In general, additional strengthening of the U.S. dollar against other major currencies would further negatively impact our sales and results of operations on an overall basis and any strengthening of the U.S. dollar against other major currencies would adversely impact our sales and results of operations.

We have generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this risk. Both positive and negative movements in currency exchange rates against the U.S. dollar will therefore continue to affect the reported amount of sales, profit, and assets and liabilities in our consolidated financial statements.

Credit Risk

We are exposed to potential credit losses in the event of nonperformance by counterparties to our financial instruments. Financial instruments that potentially subject us to credit risk consist of cash and highly-liquid investment grade cash equivalents and receivables from customers. We place cash and cash equivalents with various high-quality financial institutions throughout the world and exposure is limited at any one institution. Although we typically do not obtain collateral or other security to secure these obligations, we regularly monitor the third party depository institutions that hold our cash and cash equivalents. We emphasize safety and liquidity of principal over yield on those funds. In addition, concentrations of credit risk arising from receivables from customers are limited due to the diversity of our customers. Our businesses perform credit evaluations of their customers’ financial conditions as appropriate and also obtain collateral or other security when appropriate.

Commodity Price Risk

For a discussion of risks relating to commodity prices, refer to “Item 1A. Risk Factors.”

LIQUIDITY AND CAPITAL RESOURCES

We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. We generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity, which consist of access to term loans, commercial paper, and our revolving credit facility, in addition to short-term liquidity benefits provided by cash repatriation will be sufficient to allow us to continue funding and investing in our existing businesses, consummate strategic acquisitions, make interest and principal payments on our outstanding indebtedness, fulfill our contractual obligations, and manage our capital structure on a short and long-term basis.

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On March 27, 2020, the U.S. federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), an emergency economic stimulus package in response to the COVID-19 outbreak which, among other things, contains numerous income tax provisions and short-term liquidity assistance measures. During 2020, we deferred remittance of approximately $35 million in payroll tax payments with half subsequently remitted in December of 2021 and the remainder remitted in December of 2022.

While COVID-19 has created volatility and uncertainty in the financial markets, it has not had a significant impact on our financial position, liquidity, or ability to meet our debt covenants; however, we continue to monitor the capital markets and general global economic conditions. The financial markets worldwide, including the United States, have been impacted by COVID-19 and this volatility and disruption during the first half of 2020 impacted broad access to the capital markets and pricing on new indebtedness. Our credit facilities, including our revolving credit facility, are predominately with institutions that we believe have been relatively unaffected by the disruption. Due to the volatility and disruption in the commercial paper markets during the first six months of 2020, we temporarily reduced our reliance on this source of funding, and consequently paid down and refinanced our outstanding commercial paper with the Term Loan that was initially due March 2021 and was retired in the Debt-for-Equity Exchange. In August 2021, we resumed borrowing under our Commercial Paper Program to fund acquisitions and for general corporate purposes.

2022 Financing and Capital Transactions

On February 15, 2022, the maturity date of the 0.875% Convertible Senior Notes due 2022, Fortive repaid, in cash, $1.2 billion in outstanding principal and accrued interest thereon.

On June 17, 2022, we entered into a three-year, ¥14.4 billion senior unsecured term facility (“Yen Term Loan”). On the same day, we drew and converted the entire available balance under the facility, which yielded net proceeds of $107 million. The Yen Term Loan is due on June 17, 2025 and is pre-payable at our option. The Yen Term Loan bears interest at a rate of Tokyo Term Risk Free Rate (“TORF”), plus 65 basis points; provided, however, that the TORF may not be less than zero for the Yen Term Loan.

On June 21, 2022, we entered into a three-year €275 million senior unsecured term facility (“Euro Term Loan”). On June 28, 2022, we drew and converted the entire available balance under the facility, which yielded net proceeds of $290 million. The Euro Term Loan is due on June 23, 2025 and is pre-payable at our option. The Euro Term Loan bears interest at a rate of Euro Interbank Offered Rate (“Euribor”), plus 55 basis points; provided, however that the Euribor may not be less than zero for the Euro Term Loan.

On October 18, 2022, we entered into a second amended and restated credit agreement (the “Amended and Restated Credit Agreement”) extending the availability period of the Revolving Credit Facility to October 18, 2027 with an additional two one year extension options at our request and with the consent of the lenders. The Amended and Restated Credit Agreement also contains an option permitting us to request an increase in the amounts available under the Revolving Credit Facility of up to an aggregate additional $1.0 billion.

We are obligated to pay an annual facility fee for the Revolving Credit Facility of between 6.5 and 15 basis points varying according to our long-term debt credit rating. Borrowings under the new Revolving Credit Facility in U.S Dollars bear interest at a rate equal, at our option, to either (1) Term Secured Overnight Financing Rate (“Term SOFR”), plus a 10 basis points Credit Spread Adjustment (“CSA”) plus a margin of between 68.5 and 110.0 basis points, depending on our long-term debt credit rating or (2) the highest of (a) the Federal funds rate plus 50 basis points, (b) the prime rate, (c) Term SOFR plus 100 basis points and (d) 1.0%, plus in each case a margin between zero and 10 basis points depending on our long-term debt credit rating.

In addition, beginning with our 2023 performance relative to our annual greenhouse gas reduction targets, the interest rate on any borrowings can increase or decrease by 4.0 basis points and the facility fee can increase or decrease by 1.0 basis points, for a maximum impact of an increase or decrease of 5.0 basis points.

The Amended and Restated Credit Agreement requires us to maintain a consolidated net leverage ratio of debt to consolidated EBITDA (as defined in the Credit Agreement) of less than 3.5 to 1.0. The maximum consolidated net leverage ratio will be increased to 4.0 to 1.0 for the four consecutive full fiscal quarters immediately following the consummation of any acquisition by us in which the purchase price exceeds $250 million. The Amended and Restated Credit Agreement also contains customary representations, warranties, conditions precedent, events of default, indemnities, and affirmative and negative covenants.

As of December 31, 2022, we were in compliance with all covenants under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement continued to provide credit support for the commercial paper programs, which, to the extent not otherwise providing credit support for the commercial paper programs, can also be used for working capital and other general corporate purposes.

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On October 18, 2022, we entered into a term loan credit agreement, which provides for a 364-day delayed-draw term loan facility up to an aggregate principal amount of $1.0 billion. Borrowings under the Delayed-Draw Term Loan facility may be Base Rate Loans, Term Secured Overnight Financing Rate (“Term SOFR”) Loans, or SOFR Daily Floating Rate Loans and bears interest as follows: (1) Term SOFR Loans bear interest at a variable rate equal to Term SOFR plus a Credit Spread Adjustment of 10 basis point plus a spread of between 82.5 and 107.5 basis point, depending on the Company’s long-term credit rating; (2) SOFR Daily Floating Rate Loans, like Term SOFR Loans, bear interest at a variable rate equal to Term SOFR with a one month period plus a Credit Spread Adjustment of 10 basis point plus a spread of between 82.5 and 107.5 basis point, depending on the Company’s long-term credit rating; and (3) Base Rate Loans bear interest at the highest of (a) the Federal funds rate plus 50 basis points, (b) the prime rate, (c) Term SOFR with a one month period plus 100 basis points and (d) 1.0%, plus in each case a margin between zero and 7.5 basis points depending on our long-term debt credit rating.

On December 15, 2022, we drew down the full $1.0 billion delayed-draw senior unsecured term facility (“Delayed-Draw Term Loan Due 2023”) as a Term SOFR Loan. The repayment of the principal is due on December 14, 2023. Fortive concurrently repaid the $1.0 billion in outstanding principal of the Delayed-Draw Term Loan due 2022 and accrued interest thereon. Borrowings under the Delayed-Draw Term Loan Due 2023 are prepayable at our option in whole or in part without premium or penalty and amounts borrowed may not be reborrowed once repaid.

2021 Financing and Capital Transactions

On January 19, 2021, we completed a noncash exchange (the “Debt-for-Equity Exchange”) of 33,507,410 shares of common stock of Vontier, representing all of the Retained Vontier Shares, for $1.1 billion in aggregate principal amount of indebtedness of the Company held by Goldman Sachs & Co., including (i) all $400 million in term loan outstanding under the $750 million delayed draw term loan facility (“Term Loan due March 2021”) and (ii) $683.2 million of the $1.0 billion in term loan outstanding under the $1.0 billion delayed draw term loan facility (“Term Loan due May 2021”).

On January 21, 2021, we repaid the remaining $316.8 million outstanding of the Term Loan due May 2021 using the cash proceeds received from Vontier in the Separation. The fees associated with the prepayment were immaterial.

On February 9, 2021, we repurchased $281 million of the Convertible Notes using the remaining cash proceeds received from Vontier in the Separation and other cash on hand. In connection with the repurchase, we recorded a loss on extinguishment of $104.9 million in the first quarter of 2021.

On July 1, 2021, all outstanding shares of our 5.0% Mandatory Convertible Preferred Stock (“MCPS”) converted at a rate of 14.0978 common shares per share of preferred stock into an aggregate of approximately 19.4 million shares (net of fractional shares) of the Company’s common stock, pursuant to the terms of the Certificate of Designation governing the Series A Preferred Stock. Fortive issued cash in lieu of fractional shares of common stock in the conversion. These payments were recorded as a reduction to additional paid-in capital. The final dividend of $12.50 per share, or $17.2 million in the aggregate, was paid on July 1, 2021. The impact of the MCPS calculated under the if-converted method was anti-dilutive for the periods in 2021 prior to conversion.

In August 2021, we resumed borrowing under our Commercial Paper Program to fund, in part, acquisition activities.

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On December 16, 2021, we entered into a term loan credit agreement, which provides for a 364-day delayed-draw term loan facility up to an aggregate principal amount of $1.0 billion. Borrowings under the Delayed-Draw Term Loan facility may be Base Rate Loans, Daily Floating London Interbank Offered Rate (“LIBOR”) Loans or Eurodollar Rate Loans and bear interest as follows: (1) Eurodollar Rate Loans bear interest at a variable rate equal to the London inter-bank offered rate plus a margin of between 60.0 and 80.0 basis points, depending on the Company’s long-term debt credit rating; (2) Daily Floating LIBOR Rate Loans, like Eurodollar Rate Loans, bear interest at a variable rate equal to the London inter-bank offered rate plus a margin of between 60.0 and 80.0 basis points, depending on the Company’s long-term debt credit rating; and (3) Base Rate Loans bear interest at a variable rate equal to the highest of (a) the Federal funds rate (as published by the Federal Reserve Bank of New York from time to time) plus 1/2 of 1%, (b) Bank of America’s prime rate as publicly announced from time to time and (c) the Eurodollar Rate (as defined in the Credit Agreement) plus 1%; provided that in no event will the Eurodollar Rate be less than 0.0%.

We immediately drew down the full $1.0 billion available under the facility as a daily floating LIBOR rate loan (“Delayed-Draw Term Loan”) with repayment of the principal due December 15, 2022. The Delayed-Draw Term Loan bears interest at a variable rate equal to the daily LIBOR rate plus a spread of 60 basis points, based on Fortive’s current credit rating. Borrowings under the Delayed-Draw Term Loan facility are prepayable at the Company’s option in whole or in part without premium or penalty and amounts borrowed may not be reborrowed once repaid.

2020 Financing and Capital Transactions

In prior periods, we generally satisfied any short-term liquidity needs that are not met through operating cash flows and available cash through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”). Due to the volatility and disruption in the commercial paper markets during the first six months of 2020, we temporarily reduced our reliance on this source of funding, and consequently paid down and refinanced our outstanding commercial paper with the Term Loan Due March 2021. Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on November 30, 2023 (the “Revolving Credit Facility”) which, to the extent not otherwise providing credit support for the commercial paper programs, can also be used for working capital and other general corporate purposes.

On April 24, 2020, we amended (the “Amendments”) the credit agreement for each of our (i) $500 million delayed draw term loan facility, which has been repaid as of December 31, 2020 (“2020 Term Loan”), (ii) Term Loan Due May 2021, with $1.0 billion in principal amount outstanding as of December 31, 2020, (iii) Term Loan due March 2021, with $400 million in principal amount outstanding as of December 31, 2020, and (iv) $2.0 billion Revolving Credit Facility, with no borrowings thereunder as of December 31, 2020 as follows:

•For any four fiscal quarters ending in the periods noted below (each an “Adjusted Four Quarters”) that end prior to the maturity date of the applicable facility, the maximum permitted consolidated net leverage ratio of consolidated net funded indebtedness to consolidated EBITDA was increased from 3.50 to 1.00 to, (i) with respect to the four fiscal quarters ending June 26, 2020, September 25, 2020, December 31, 2020, or April 2, 2021, 4.75 to 1.00, (ii) with respect to the four fiscal quarters ending July 2, 2021, 4.5 to 1.0, (iii) with respect to the four fiscal quarters ending October 1, 2021, 4.25 to 1.0 and (iv) with respect to the four fiscal quarters ending December 31, 2021, 3.75 to 1.0; provided however, that for any four fiscal quarters that are not an Adjusted Four Quarters, the maximum permitted consolidated net leverage ratio remains at 3.5 to 1.0, as may be increased to 4.0 to 1.0 following a material acquisition (the “Unadjusted Maximum Ratio”).

•The maturity date for the Term Loan Due May 2021 was extended from August 28, 2020 to May 30, 2021.

•From April 24, 2020 to December 31, 2021, the minimum London inter-bank offered rate (“LIBOR”) for each of the facilities will increase from 0% to 0.25%, and the minimum base rate for each of the facilities will increase from 1.00% to 1.25%. In addition, with respect to the Revolving Credit Facility and for any Adjusted Four Quarters in which the consolidated net leverage ratio is greater than the Unadjusted Maximum Ratio, the applicable margin (as determined based on our long-term debt credit rating) for any LIBOR rate loans will increase from a range of 80.5 and 117.5 basis points to a range of 118.0 and 155.0 basis points and for any base rate loans from a range of 0.0 and 17.5 basis points to a range of 18.0 and 55.0 basis points. Furthermore, with respect to the Term Loan Due May 2021, the applicable margin (as determined based on our long-term debt credit rating) for any LIBOR rate loans will increase from a range of 75.0 and 97.5 basis points to a range of 155.0 and 180.0 basis points and for any base rate loans from 0.0 to a range of 55.0 and 80.0 basis points.

•From April 24, 2020 to December 31, 2021, the maximum principal amount of secured indebtedness, other than certain types of secured indebtedness expressly permitted under each credit agreement, is decreased from 15% of our consolidated net assets (when added together with indebtedness incurred or guaranteed by any of our subsidiaries) to

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11.25% of our consolidated net assets (when added together with indebtedness incurred or guaranteed by any of our subsidiaries).

In connection with the Amendments, we incurred approximately $6.5 million of fees. Our credit facility agreements require, among others, that we maintain certain financial covenants and we were in compliance with all of our financial covenants on December 31, 2021.

During 2020, we completed the following financing and capital transactions:

•On February 25, 2020, we extended the maturity of the Term Loan Due May 2021 to August 28, 2020. Additionally, on April 24, 2020 we further extended the maturity to May 30, 2021. We were in compliance with our covenants both before and after the extension. The Term Loan due May 2021 was not callable and remained prepayable at our option.

•On February 26, 2020, we prepaid $250 million and on October 9, 2020, we repaid the remaining $250 million of the 2020 Term Loan. The fees associated with both prepayments were immaterial.

•On March 23, 2020, we entered into a credit facility agreement that provided for the Term Loan due March 2021 in an aggregate principal amount of $425 million. On the same day, we drew down $375 million available under the Term Loan due March 2021. We subsequently increased the size of this facility by $325 million on April 3, 2020, and drew the additional $375 million in April 2020, resulting in an outstanding amount of $750 million. We paid approximately $2 million in debt issuance costs associated with the Term Loan Due March 2021. The borrowings from this credit facility were used for settlement of outstanding commercial paper. Term Loan due March 2021 bore interest at a variable rate equal to LIBOR plus a ratings-based margin currently at 155 basis points. As of December 31, 2020 borrowings under this facility bore an interest rate of 1.80% per annum. The Term Loan due March 2021 was due on March 19, 2021 and prepayable at our option. We are not permitted to re-borrow once the term loan is repaid. The terms and conditions, including covenants, applicable to the Term Loan due March 2021, are substantially similar to those applicable to our Revolving Credit Facility.

•On October 9, 2020, we repaid $350 million of the outstanding $750 million of the Term Loan due March 2021. The fees associated with the prepayment were immaterial.

•On October 15, 2020, we repaid the outstanding ¥13.8 billion balance of the Yen variable interest rate term loan due 2022 which approximated $131 million.

•On November 13, 2020, we redeemed for cash all $750 million aggregate principal of our outstanding 2.35% Senior Notes due 2021 (the “Notes”) in accordance with the terms of the indenture governing the Notes. In connection with the transaction, we wrote-off the remaining unamortized deferred financing costs of $0.7 million and recorded a loss on extinguishment of $8 million.

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Overview of Cash Flows and Liquidity

Following is an overview of our cash flows and liquidity:

Operating Activities

Operating cash flows from continuing operations can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, interest, pension funding, and other items impact reported cash flows.

Operating cash flows from continuing operations were approximately $1.3 billion in 2022, representing an increase of $310 million, or approximately 31%, as compared to 2021, and primarily attributable to the following factors:

•Year-over-year increase of $219 million in Operating cash flow from net earnings from continuing operations, net of non-cash items (Amortization, Depreciation, Stock-based compensation, Loss on extinguishment of debt, Gain on investment in Vontier Corporation, Gain on litigation resolution, and Russia exit and wind down costs).

•The aggregate changes in accounts receivable, inventories, and trade accounts payable used $11 million of cash during 2022 compared to using $64 million of cash during 2021. 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 generally represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers, and can be significantly impacted by the timing of collections and payments in a period.

•The aggregate change in prepaid expenses and other assets, accrued expenses and other liabilities, and changes in deferred income taxes used $10 million of cash in 2022 as compared to using $47 million in 2021. The year-over-year changes were driven by timing differences in tax payments and employee compensation and benefits.

Operating cash flows from continuing operations were approximately $993 million in 2021, an increase of $15 million, or approximately 2%, as compared to 2020. This year-over-year change in operating cash flows from continuing operations was primarily attributable to the following factors:

•2021 operating cash flows were impacted by lower net earnings from continuing operations as compared to 2020, which were driven by a year-over-year increase in operating profits of $273 million, a decrease in interest expense of $45 million associated with the net repayment of debt, a gain on the Retained Vontier Shares of $57 million and a gain on litigation resolution of $30 million, which were partially offset by the loss on extinguishment of debt of $105 million. The gain on the Retained Vontier Shares and litigation dismissal, and substantially all of the loss on the

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extinguishment of debt, are noncash items that impact net earnings without a corresponding impact to operating cash flows.

•The aggregate of accounts receivable, inventories, and trade accounts payable used $64 million of operating cash flows during 2021 compared to providing $93 million of cash during 2020. 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 generally represents the number of days that elapse from the day we pay for the purchase of raw materials and components to the collection of cash from our customers, and can be significantly impacted by the timing of collections and payments in a period. During 2021 we experienced an increase in inventory due, in part, to higher safety stock levels, which were increased to buffer the impact of supply chain and logistics challenges and to fulfill customer demand.

•The aggregate of prepaid expenses and other assets, accrued expenses and other liabilities, and changes in deferred income taxes used $47 million of cash in 2021 as compared to providing $110 million in 2020 with year-over-year change largely driven by the funding of a $28 million deferred compensation liability, which was associated with the ServiceChannel acquisition and was paid into escrow upon closing of the transaction, as well as other routine changes in various compensation and benefit payments.

Investing Activities

Investing cash flows from continuing operations consist primarily of cash paid for acquisitions and capital expenditures. Net cash used in investing activities from continuing operations was approximately $103 million during 2022 compared to approximately $2.6 billion and $110.8 million of net cash used in 2021 and 2020, respectively. The decrease in investing cash flow during 2022 as compared to 2021 was driven by our acquisition of ServiceChannel and Provation in 2021, which was partially offset by increased capital expenditures of approximately $46 million in 2022.

The reduction in cash used for investing cash flows in 2021 as compared to 2020 was driven by the acquisitions of ServiceChannel and Provation, which occurred in 2021 and totaled approximately $2.6 billion, partially offset by a year-over-year decrease in capital expenditures of $26 million.

Capital expenditures are made primarily for increasing capacity, replacing aged equipment, supporting product development initiatives for hardware and software offerings, improving information technology systems, and purchasing equipment used in revenue arrangements with customers. Capital expenditures totaled $96 million in 2022, $50 million in 2021, and $76 million in 2020. We expect capital spending to be between approximately $90 million and $110 million in 2023, though actual expenditures will ultimately depend on business conditions.

Financing Activities and Indebtedness

Financing cash flows from continuing operations consist primarily of cash flows associated with the issuance of equity, the issuance and repayments of debt and commercial paper, payments of quarterly cash dividends to common and preferred shareholders, and cash consideration received from the Vontier Separation. Financing activities from continuing operations used cash of $1.3 billion in 2022, generated cash of $652 million in 2021 and used cash of $676 million in 2020.

On February 17, 2022, the Company's Board of Directors approved a share repurchase program authorizing the Company to repurchase up to 20 million shares of the Company's outstanding common stock from time to time on the open market or in privately negotiated transactions. There is no expiration date for the repurchase program, and the timing and amount of repurchases under the program are determined by the Company's management based on market conditions and other factors. The repurchase program may be suspended or discontinued at any time by the Board of Directors.

Financing activities from continuing operations during 2022 reflected the following transactions:

•On June 17, 2022, we entered into a three-year, ¥14.4 billion Yen Term Loan. On the same day, we drew and converted the entire available balance under the facility, which yielded net proceeds of $107 million.

•On June 21, 2022, we entered into a three-year €275 million Euro Term Loan. On June 28, 2022, we drew and converted the entire available balance under the facility, which yielded net proceeds of $290 million.

•On February 15, 2022, the maturity date of the Convertible Notes, we repaid, in cash, $1.2 billion in outstanding principal and accrued interest thereon.

•On October 18, 2022, we entered into a term loan credit agreement, which provides for a 364-day delayed draw term loan facility up to an aggregate principal amount of $1.0 billion. On December 15, 2022, we drew down the full $1.0 billion delayed-draw senior unsecured term facility (“Delayed-Draw Term Loan Due 2023”) as a Term SOFR Loan. The repayment of the principal is due on December 14 2023. We concurrently repaid the $1.0 billion in outstanding principal of the Delayed-Draw Term Loan due 2022 and accrued interest thereon.

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•During 2022, we increased borrowings by $39 million in net commercial paper under the U.S. dollar-denominated commercial paper program. As of December 31, 2022, the commercial paper borrowings had a weighted average annual effective rate of 4.80% and a weighted average maturity of approximately 32 days.

•During 2022, we repurchased 7 million shares of our outstanding common stock for approximately $443 million under our publicly-announced share repurchase program.

•During 2022, we made dividend payments to common shareholders totaling $99.5 million.

In 2021, we repaid the remaining $317 million outstanding on the Delayed-Draw Term Loan Due 2020, repurchased $281 million of the 0.875% Convertible Senior Notes due 2022, and resumed borrowing under our Commercial Paper Programs, with proceeds being used for acquisitions and general corporate purposes. During the year ended December 31, 2021, we paid $132 million of cash dividends to common shareholders and holders of our MCPS.

In 2020, we repaid $1.1 billion related to the issuance of commercial paper under the Commercial Paper Program, received proceeds from borrowings of $742 million, repaid $1.7 billion of borrowings, and paid $163 million of cash dividends to shareholders.

Refer to “—Liquidity and Capital Resources” section above for a description of our financing activities in 2022, 2021, and 2020.

We generally expect to satisfy any short-term liquidity needs that are not met through operating cash flows and available cash primarily through term loans or issuances of commercial paper under the Commercial Paper Programs, with credit support provided by the Revolving Credit Facility.

The carrying value of total debt outstanding as of December 31, 2022 was approximately $3.3 billion. We had $2.0 billion available under the Revolving Credit Facility as of December 31, 2022. Refer to Note 11 to the consolidated 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 when we have outstanding borrowings. As of December 31, 2022 and December 31, 2021, we had $405 million and $365 million borrowings outstanding under our Commercial Paper Program, respectively. We expect to limit any future borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, to repay any outstanding commercial paper as it matures.

Dividends

On November 3, 2022, we declared a regular quarterly dividend of $0.07 per common share paid on December 30, 2022 to holders of record on November 30, 2022.

Aggregate cash payments for both common and MCPS dividends paid to shareholders during the year ended December 31, 2021 were $132 million and were recorded as dividends to shareholders in the Consolidated Statement of Changes in Equity and the Consolidated Statement of Cash Flows.

Subsequent Event

On January 24, 2023 we declared a regular quarterly cash dividend of $0.07 per share payable on March 31, 2023 to common stockholders of record on February 24, 2023.

Cash and Cash Requirements

Cash

As of December 31, 2022, we held approximately $0.7 billion of cash and cash equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less. The annual effective rate was immaterial. Approximately 16% of our cash at December 31, 2022 was held in the U.S.

We have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our pension plans as required, pay dividends to shareholders, and support other business needs or objectives. With respect to our cash requirements, we generally intend to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions, we may also borrow under our commercial paper programs or credit facilities or enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity

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under our commercial paper programs. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions.

Foreign cumulative earnings remain subject to foreign remittance taxes. We have made an election regarding the amount of earnings that we do not intend to repatriate due to local working capital needs, local law restrictions, high foreign remittance costs, previous investments in physical assets and acquisitions, or future growth needs. For most of our foreign operations, we make an assertion regarding the amount of earnings in excess of intended repatriation that are expected to be held for indefinite reinvestment. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings.

Cash Requirements

The following table sets forth a summary of our short-term and long-term cash requirements as of December 31, 2022 under (1) long-term debt principal and interest obligations, (2) leases, (3) purchase obligations and (4) other long-term liabilities reflected on our balance sheet under GAAP. Certain of our acquisitions may involve the potential payment of contingent consideration. The table below does not reflect any such obligations, as the timing and amounts of any such payments are uncertain.

In addition to the obligations noted above, we have issued guarantees, consisting primarily of outstanding standby letters of credit, bank guarantees, and performance and bid bonds, in connection with certain arrangements with vendors, customers, financing counterparties, and governmental entities to secure our obligations and/or performance requirements related to specific transactions. These guarantees are not recorded on our balance sheet and $41 million in commitments expire within one year of December 31, 2022 and $17 million later than one year from December 31, 2022.

During 2022, we contributed $2 million and $11 million to our U.S. and non-U.S. defined benefit pension plans, respectively. During 2023, our cash contribution requirements for our U.S. and non-U.S. defined benefit pension plans are expected to be approximately $1 million and $11 million, respectively. The ultimate amounts we will contribute 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.

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As of December 31, 2022 we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future, including our cash needs in the United States.

Legal Proceedings

Please refer to Note 16 to the consolidated financial statements for information regarding legal proceedings and contingencies, and for a discussion of risks related to legal proceedings and contingencies, refer to “Item 1A. Risk Factors.”

CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience, the current economic environment, and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates and judgments.

We believe the following accounting estimates are most critical to an understanding of our financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the estimate is made, and (2) material changes in the estimate are reasonably likely from period to period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 2 to the consolidated financial statements.

Accounts Receivable: We measure our allowance to reflect expected credit losses over the remaining contractual life of the asset in accordance with ASU No. 2016-13 Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. We pool assets with similar risk characteristics for this measurement based on attributes that may include asset type, duration, and/or credit risk rating. The future expected losses of each pool are estimated based on numerous quantitative and qualitative factors reflecting management’s estimate of collectability over the remaining contractual life of the pooled assets, including:

•duration;

•historical, current, and forecasted future loss experience by asset type;

•historical, current, and forecasted delinquency and write-off trends;

•historical, current, and forecasted economic conditions; and

•historical, current, and forecasted credit risk.

We regularly perform detailed reviews of our trade accounts and unbilled receivable portfolios to determine if changes in the aforementioned qualitative and quantitative factors have impacted the adequacy of the allowances.

Volatility and uncertainty in overall global economic conditions and worldwide capital markets may negatively impact our customers’ ability to pay and, as a result, may increase the difficulty in collecting trade accounts and unbilled receivables. We did not realize notable increases in loss rates and delinquencies or record material provisions for credit losses during the year ended December 31, 2022 or 2021. If the financial condition of our customers were to deteriorate beyond our current estimates, resulting in an impairment of their ability to make payments, we would be required to write-off additional receivable balances, which would adversely impact our net earnings and financial condition. In order to evaluate the sensitivity of the estimates used in the calculation of our allowance, we applied a hypothetical 10% decrease in anticipated collectability, noting that our allowance would increase by approximately $4 million with a corresponding charge to SG&A.

Expected credit losses of the assets originated during the year ended December 31, 2022, as well as changes to expected losses during the same periods, are recognized in earnings for the year ended December 31, 2022.

Inventories: We record inventory at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We estimate the net realizable value of our inventory based on assumptions of future demand and related pricing. Estimating the net realizable value of inventory is inherently uncertain because levels of demand, technological advances, and pricing competition in many of our markets can fluctuate significantly from period to period due to circumstances beyond our control. If actual market conditions are less favorable than those we projected, we could be required to reduce the value of our inventory, which would adversely impact our financial statements. In order to evaluate the sensitivity of the estimates used in the calculation of the net realizable value of our inventory, we applied a hypothetical 10% decrease to the anticipated realization, noting that our inventory would decrease by approximately $6 million with a corresponding charge to Cost of goods sold. Refer to Note 5 to the consolidated financial statements for detailed information regarding our inventory balances as of December 31, 2022.

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Acquired Intangibles and Goodwill: Our business acquisitions typically result in the recognition of goodwill, developed technology, and other intangible assets, which affect the amount of future period amortization expense and possible impairment charges that we may incur. Refer to Notes 2, 3 and 7 to the consolidated financial statements for a description of our policies relating to goodwill, acquired intangibles, and acquisitions.

In performing our goodwill impairment testing, we estimate the fair value of our reporting units primarily using a market based approach. We estimate fair value based on multiples of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) determined by current trading market multiples of earnings for companies operating in businesses similar to each of our reporting units, in addition to recent market available sale transactions of comparable businesses. In evaluating the estimates derived by the market based approach, we make judgments about the relevance and reliability of the multiples by considering factors unique to our reporting units, including operating results, business plans, economic projections, anticipated future cash flows, and transactions and marketplace data as well as judgments about the comparability of the market proxies selected. In certain circumstances we also evaluate other factors including results of the estimated fair value utilizing a discounted cash flow analysis (i.e., an income approach), market positions of the businesses, comparability of market sales transactions, and financial and operating performance in order to validate the results of the market approach. The discounted cash flow model requires judgmental assumptions about projected revenue growth, future operating margins, discount rates, and terminal values. There are inherent uncertainties related to these assumptions and management’s judgment in applying them to the analysis of goodwill impairment.

In 2022, we performed goodwill impairment testing for our reporting units. Reporting units resulting from recent acquisitions generally present the highest risk of impairment. We believe the impairment risk associated with these reporting units generally decreases as we integrate these businesses and better position them for potential future earnings growth. As of the date of the 2022 annual impairment test, the carrying value of goodwill in each reporting unit ranged from $171 million to $4.0 billion. Our annual goodwill impairment analysis in 2022 indicated that, in all instances, the fair values of our reporting units exceeded their carrying values and consequently did not result in an impairment charge.

The excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of our reporting units as of the annual testing date ranged from approximately 25% to approximately 775%. In order to evaluate the sensitivity of the fair value calculations used in the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit and compared those hypothetical values to the reporting unit carrying values. Based on this hypothetical 10% decrease, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value for the respective reporting unit) for each of our reporting units ranged from approximately 12% to approximately 680%. We evaluated other factors relating to the fair value of the reporting units, including, as applicable, results of the estimated fair value using an income approach, market positions of the businesses, comparability of market sales transactions and financial and operating performance, and concluded no impairment charges were required.

We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires a comparison of the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. We also test intangible assets with indefinite lives at least annually for impairment. These analyses require management to make judgments and estimates about future revenues, expenses, market conditions, and discount rates related to these assets.

If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may be overstated and a charge would need to be taken against net earnings which would adversely affect our financial statements.

Contingent Liabilities: As discussed in Note 16 to the consolidated financial statements, we are, from time to time, subject to a variety of litigation and similar contingent liabilities incidental to our business (or the business operations of previously owned entities). We recognize a liability for any contingency that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims, and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors, including those discussed in Note 16 to the consolidated financial statements. If the reserves we established with respect to these contingent liabilities are inadequate, we would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our financial statements.

Revenue Recognition: We derive revenue from the sale of products and services. Revenue is recognized when control over the promised products or services is transferred to the customer in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. In determining if control has transferred, we consider whether certain indicators of the transfer of control are present, such as the transfer of title, present right to payment, significant risks and rewards of ownership, and customer acceptance when acceptance is not a formality. To determine the consideration that the customer owes us, we make judgments regarding the amount of customer allowances and rebates, consisting primarily of

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volume discounts and other short-term incentive programs. Refer to Note 2 to the consolidated financial statements for a description of our revenue recognition policies.

If our judgments regarding revenue recognition prove incorrect, our reported revenues in particular periods may be adversely affected. Historically, our estimates of revenue have been materially correct.

Stock-Based Compensation: For a description of our stock-based compensation accounting practices, refer to Note 17 to the consolidated financial statements. Determining the appropriate fair value model and calculating the fair value of certain stock-based payment awards require subjective assumptions, including the expected life of the awards, stock price volatility, and expected forfeiture rate. Given our limited trading history following the separation from Danaher, stock price volatility used to calculate the fair value of stock options in the post-separation period was estimated based on an average historical stock price volatility of a group of peer companies. Expected volatility is based on a weighted average blend of our historical stock price volatility from July 2, 2016 (the date of the Danaher separation) through the stock option grant date and the average historical stock price volatility of a group of peer companies for the expected term of the options. The assumptions used in calculating the fair value of stock-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of judgment. If actual results are not consistent with our assumptions and estimates, our equity-based compensation expense could be materially different in the future.

Pension and Other Post Employment Benefits: For a description of our pension accounting practices, refer to Note 12 to the consolidated financial statements. Certain of our U.S. and non-U.S. employees participate in noncontributory defined benefit pension plans. Calculations of the amount of pension costs and obligations depend on the assumptions used in the actuarial valuations, including assumptions regarding discount rates, expected return on plan assets, rates of salary increases, health care cost trend rates, mortality rates, and other factors. If the assumptions used in calculating pension and other post-retirement benefits costs and obligations are incorrect or if the factors underlying the assumptions change (as a result of differences in actual experience, changes in key economic indicators, or other factors), our financial statements could be materially affected. A 50 basis point reduction in the discount rates used for the plans during 2022 would have increased the net obligation by $30 million from the amounts recorded in the financial statements as of December 31, 2022.

Our plan assets consist of various insurance contracts, equity and debt securities as determined by the administrator of each plan. The estimated long-term rate of return for the plans was determined on a plan by plan basis based on the nature of the plan assets and ranged from 1.25% to 5.20%. If the expected long-term rate of return on plan assets during 2022 was reduced by 50 basis points, pension expense in 2022 would have increased by $1.1 million ($1.0 million on an after-tax basis).

Income Taxes: For a description of our income tax accounting policies, refer to Note 2 and Note 14 to the consolidated financial statements.

In accordance with GAAP, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which the tax benefit has already been reflected in our Consolidated Statements of Earnings. Deferred tax liabilities generally represent items that have already been taken as a deduction on our tax return but have not yet been recognized as an expense in our Consolidated Statements of Earnings. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

Our deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all of the deferred tax assets will not be realized. We evaluate the realizability of deferred income tax assets for each of the jurisdictions in which we operate. If we experience cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, we normally conclude that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments would lead management to conclude otherwise. However, if we experience cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, we then consider a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, and prudent and feasible tax planning strategies. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, we would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, we establish a valuation allowance.

We recognize tax benefits from uncertain tax positions only if, in our assessment, it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits

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recognized in the financial statements from such positions are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Judgment is required in evaluating tax positions and determining income tax provisions. We re-evaluate the technical merits of our tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (i) a tax audit is completed; (ii) applicable tax laws change, including a tax case ruling or legislative guidance; or (iii) the applicable statute of limitations expires. We recognize potential accrued interest and penalties with unrecognized tax positions in income tax expense.

In addition, we are routinely examined by various domestic and international taxing authorities. The amount of income taxes we pay is subject to audit by federal, state, and foreign tax authorities, which may result in proposed assessments (see “-Results of Operations - Income Taxes” and Note 14 to the consolidated financial statements). We review our global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings, and court decisions and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary.

An increase in our 2022 effective tax rate of 1.0% would have resulted in an additional income tax provision for the year ended December 31, 2022 of approximately $9 million.

NEW ACCOUNTING STANDARDS

For a discussion of new accounting standards relevant to our businesses, refer to Note 2 to the consolidated financial statements.