# Fortive Corp (FTV) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from Fortive Corp's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1659166/000165916624000046/ftv-20231231.htm Accession: 0001659166-24-000046 Filing date: 2024-02-27 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/FTV/ All MD&A years: /company/FTV/mda/ Previous year: /company/FTV/mda/fy2022/ (FY 2022) Next year: /company/FTV/mda/fy2024/ (FY 2024) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of Fortive’s financial condition and results of operations for the fiscal years ended December 31, 2023 and December 31, 2022 should be read in conjunction with our audited consolidated financial statements and accompanying notes included in Part II, Item 8 of this Form 10-K. This Item generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 are not included, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) in Part II, Item 7 of the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2022 with the Securities and Exchange Commission on February 28, 2023. Fortive 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 have a workforce of more than 18,000 research and development, manufacturing, sales, distribution, service, and administrative professionals in more than 50 countries around the world. This 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 •Results of Operations •Financial Instruments and Risk Management •Liquidity and Capital Resources •Critical Accounting Estimates 29 Table of Contents •New Accounting Standards OVERVIEW General Fortive is a multinational business with global operations with approximately 46% of our sales derived from customers outside the United States in 2023. As a company with global operations, our businesses are affected by worldwide, regional, and industry-specific economic 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. 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 and divested businesses and (2) the impact of currency translation. References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to certain 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 During 2023, aggregate year-over-year sales increased 4.1%, primarily due to an increase in sales from existing businesses which increased year over year by 4.8% comprised of favorable pricing of 4.5% and increased volume of 0.3%. Geographically, year-over-year sales from existing businesses in developed markets increased by mid-single-digits, driven by mid-single-digit growth in North America, low single-digit growth in Western Europe, and low double-digit growth in Japan. 30 Table of Contents Year-over-year sales from existing businesses in high growth markets increased mid-single-digits, driven by low single-digit growth in Asia, which includes low single-digit growth in China, and high single-digit growth in Latin America. The strengthening of the U.S. dollar relative to other currencies reduced our sales by 0.6% during 2023, as compared to 2022 and may continue to impact our results in future periods. Sales from divested business, offset by revenue from acquisitions reduced sales by 0.1% as compared to 2022. Acquisitions During the year ended December 31, 2023, we made four acquisitions (“the 2023 acquisitions”) in our Intelligent Operating Solutions segment for an aggregate cash consideration of $101.4 million, which includes an immaterial deferred payment, net of acquired cash. The 2023 acquisitions are intended to accelerate our strategy and strengthen our product portfolio, providing world-class solutions to our customers. We recorded approximately $56.7 million of goodwill related to the acquisitions, which is not tax deductible. Divestitures 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 was recorded within “Other non-operating expense, net” in the Consolidated Statements of Earnings. The divestiture of this product line did not represent a strategic shift with a significant effect on the Company’s operations and financial results and therefore the divested product line is not reported as a discontinued operation. Restructuring We initiated a discrete plan in the first quarter of 2023 that was completed during the fourth quarter of 2023. The nature of these activities were broadly consistent throughout our segments and consist primarily of targeted workforce reductions in response to overall macroeconomic and other external conditions. We incurred these costs to position ourselves to provide superior products and services to customers in a cost-efficient manner, while taking into consideration the impact of broad economic uncertainties. We incurred charges of $58.6 million during the year ended December 31, 2023. These charges are recorded within Cost of sales and Selling, general, and administrative expenses in the Consolidated Statements of Earnings. Other Matters We experienced cybersecurity incidents in the fourth quarter of fiscal 2023. To date, the disruptions from the cybersecurity incidents did not materially impact business continuity or operations. We continue to actively investigate the incidents with the assistance of leading cybersecurity experts, including the nature of the data that was impacted, and continue to implement robust containment and remedial measures. On January 3, 2024, we acquired EA Elektro-Automatik Holding GmbH (“EA”), a leading supplier of high-power electronic test solutions for energy storage, mobility, hydrogen, and renewable energy applications. The total consideration paid was approximately $1.72 billion, net of acquired cash. We are currently in the process of finalizing the accounting for this transaction. On January 1, 2024, we realigned Invetech from the Advanced Healthcare Solutions segment to the Precision Technologies segment as we consider strategic alternatives for certain products and services of Invetech. The remaining products and operations of Invetech are more closely aligned with the Precision Technologies segment. In 2023, we entered into an agreement to optimize our real estate footprint within our Precision Technologies segment for proceeds of approximately $90 million. We expect the transaction to be completed in the first half of 2024, with a gain from the transaction recognized at the time of closing. 2024 Outlook We anticipate full year sales to grow on a year-over-year basis by approximately 6% and 8% with year-over-year growth from existing businesses of approximately 2% and 4%. 31 Table of Contents We expect foreign exchange rates to remain volatile throughout the year which could adversely impact our financial results. Additionally, our financial outlook is subject to various assumptions and risks, including but not limited to, macroeconomic conditions in the United States and other critical regions, ongoing challenges with global logistics and supply chains, disruption in supply or transportation resulting from severe weather or other events, impact of inflationary dynamics on our expenses or our ability to realize price increases in our sales, interest rates, market conditions in key product segments, and elective surgery rates. We will continue to deploy FBS to actively manage production challenges, collaborate with customers and suppliers to minimize disruptions and utilize pricing and other countermeasures to offset the aforementioned dynamics. We continue to monitor these conditions which may continue to impact our business, as well as potential adverse global economic trends and sentiments, monetary and fiscal policies, international trade and relations between the U.S., China and other nations, and investment and taxation policy initiatives being considered in the United States and by the Organization for Economic Co-operation and Development (“OECD”), including the potential impact of the Pillar Two initiative. RESULTS OF OPERATIONS Components of Sales Growth [[GREPCENT_TABLE]] [["","2023 vs. 2022"],["Total revenue growth (GAAP)","4.1","%"],["Existing businesses (Non-GAAP)","4.8","%"],["Acquisitions and divestitures (Non-GAAP)","(0.1)","%"],["Currency exchange rates (Non-GAAP)","(0.6)","%"]] [[/GREPCENT_TABLE]] Refer to Intelligent Operating Solutions, Precision Technologies, and Advanced Healthcare Solutions sections below for further discussion of year-over-year sales growth. Operating Profit Margins 2023 vs. 2022 Operating profit margins were 18.7% for the year ended December 31, 2023, an increase of 180 basis points as compared to 16.9% in 2022 with year-over-year operating profit margin comparisons impacted by: •Year-over-year increase in price and volume from existing businesses and gains from productivity measures, which were partially offset by higher employee compensation, unfavorable product mix and foreign exchange rates — favorable 160 basis points •The year-over-year effect of amortization from existing businesses offset by impairment of intangible assets — favorable 40 basis points •The year-over-year net effect of acquisition-related transaction costs which were lower in 2023 — favorable 40 basis points •The year-over-year net effect of acquired and divested businesses, including amortization, and acquisition-related fair value adjustments — favorable 5 basis points •The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 95 basis points •Russia exit and wind down costs that were incurred during 2022 — favorable 30 basis points 32 Table of Contents Business Segments and Geographic Area Results Sales by business segment and geographic area for the year ended December 31 are as follows ($ in millions): [[GREPCENT_TABLE]] [["","2023","","2022"],["Segments"],["Intelligent Operating Solutions","$","2,612.2","","","$","2,466.1"],["Precision Technologies","2,132.8","","","2,038.2"],["Advanced Healthcare Solutions","1,320.3","","","1,321.4"],["Total","$","6,065.3","","","$","5,825.7"],["Geographic area"],["United States","$","3,288.4","","","$","3,136.8"],["China","694.9","","","702.1"],["All other (each country individually less than 5% of total sales)","2,082.0","","","1,986.8"],["Total","$","6,065.3","","","$","5,825.7"]] [[/GREPCENT_TABLE]] 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 [[GREPCENT_TABLE]] [["","For the Year Ended December 31"],["($ in millions)","2023","","2022"],["Sales","$","2,612.2","","","$","2,466.1"],["Operating profit","628.8","","","519.4"],["Depreciation","33.9","","","33.9"],["Amortization","185.5","","","184.4"],["Operating profit as a % of sales","24.1","%","","21.1","%"],["Depreciation as a % of sales","1.3","%","","1.4","%"],["Amortization as a % of sales","7.1","%","","7.5","%"]] [[/GREPCENT_TABLE]] Components of Sales Growth [[GREPCENT_TABLE]] [["","2023 vs. 2022"],["Total revenue growth (GAAP)","5.9","%"],["Existing businesses (Non-GAAP)","5.9","%"],["Acquisitions and divestitures (Non-GAAP)","0.3","%"],["Currency exchange rates (Non-GAAP)","(0.3)","%"]] [[/GREPCENT_TABLE]] 2023 COMPARED TO 2022 The sales result for 2023 was driven by price increases across the segment and demand in software and service offering in EHS and facility and asset lifecycle applications, partially offset by volume reductions in certain products in our test and measurement instrumentation business. Geographically, year-over-year sales from existing businesses in developed markets increased by mid-single-digits during 2023, driven by mid-single-digit growth in North America and low single-digit growth in Western Europe. Sales in high growth markets increased by low double-digits during 2023, driven by low double-digit growth in Asia, including low double-digit growth in China. Year-over-year price increases in our Intelligent Operating Solutions segment contributed 4.2% to sales growth in 2023, as compared to 2022, and is reflected as a component of the change in sales from existing businesses. 33 Table of Contents Operating profit margin increased 300 basis points during 2023 as compared to 2022. Year-over-year changes in operating profit margin were comprised of the following: •Year-over-year increase in price and sales volume from existing businesses and gains from productivity measures, partially offset by higher employee compensation — favorable 315 basis points •The year-over-year effect of amortization from existing businesses offset by impairment of intangible assets — favorable 20 basis points •The year-over-year effect of acquisition-related transaction costs which were lower in 2023 — favorable 65 basis points •The year-over-year effect of acquired businesses, including amortization, and acquisition-related fair value adjustments — unfavorable 10 basis points •The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 90 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. Precision Technologies Selected Financial Data [[GREPCENT_TABLE]] [["","For the Year Ended December 31"],["($ in millions)","2023","","2022"],["Sales","$","2,132.8","","","$","2,038.2"],["Operating profit","540.3","","","491.3"],["Depreciation","26.2","","","24.2"],["Amortization","3.6","","","13.5"],["Operating profit as a % of sales","25.3","%","","24.1","%"],["Depreciation as a % of sales","1.2","%","","1.2","%"],["Amortization as a % of sales","0.2","%","","0.7","%"]] [[/GREPCENT_TABLE]] Components of Sales Growth [[GREPCENT_TABLE]] [["","2023 vs. 2022"],["Total revenue growth (GAAP)","4.6","%"],["Existing businesses (Non-GAAP)","5.1","%"],["Currency exchange rates (Non-GAAP)","(0.5)","%"]] [[/GREPCENT_TABLE]] 2023 COMPARED TO 2022 The sales result for 2023 was driven by price increases across the segment and volume increases with test and measurement products, power and energy equipment and energetic materials, partially offset by volume reductions in certain end markets for sensing technologies. Geographically, year-over-year sales from existing businesses in developed markets increased by high single-digits during 2023, driven by high single-digit growth in both North America, low single-digit growth in Western Europe, and mid-teens growth in Japan. Sales in high growth markets increased by low single-digits during 2023, where we saw low-forties growth in the Middle East and a low single-digit decline in Asia, which includes a low single-digit decline in China. Year-over-year price increases in our Precision Technologies segment contributed 5.7% to sales growth during 2023 as compared to 2022, and is reflected as a component of the change in sales from existing businesses. Operating profit margin increased 120 basis points during 2023 as compared to 2022. Year-over-year changes in operating profit margin were comprised of the following: 34 Table of Contents •Year-over-year increases in price from existing businesses and gains from productivity measures, all partially offset by higher employee compensation, unfavorable product mix, and reductions in volume — favorable 170 basis points •The year-over-year effect of amortization from existing businesses — favorable 50 basis points •The year-over-year effects of acquisition-related transaction expenses incurred in 2023 - unfavorable 10 basis points •The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 90 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 [[GREPCENT_TABLE]] [["","For the Year Ended December 31"],["($ in millions)","2023","","2022"],["Sales","$","1,320.3","","","$","1,321.4"],["Operating profit","105.5","","","107.9"],["Depreciation","22.2","","","21.6"],["Amortization","181.4","","","184.2"],["Operating profit as a % of sales","8.0","%","","8.2","%"],["Depreciation as a % of sales","1.7","%","","1.6","%"],["Amortization as a % of sales","13.7","%","","13.9","%"]] [[/GREPCENT_TABLE]] Components of Sales Growth [[GREPCENT_TABLE]] [["","2023 vs. 2022"],["Total revenue growth (GAAP)","(0.1)","%"],["Existing businesses (Non-GAAP)","2.2","%"],["Acquisitions and divestitures (Non-GAAP)","(1.1)","%"],["Currency exchange rates (Non-GAAP)","(1.2)","%"]] [[/GREPCENT_TABLE]] 2023 COMPARED TO 2022 The sales results for 2023 was primarily driven by price increases across the segment and demand increases for software and related services, partially offset by a reduction in volume in system design services. Geographically, year-over-year sales from existing businesses in developed markets increased by low single-digits during 2023, driven by low single-digit growth in both North America and Western Europe, as well as high single-digit growth in Japan. Sales in high growth markets increased low single-digits during 2023, with mid-teens growth in Latin America and mid-single-digit growth in China, partially offset by mid-single-digit decline in the rest of Asia and a mid-twenties decline in Eastern Europe driven by the exit from Russia in 2022. Year-over-year price increases in our Advanced Healthcare Solutions segment contributed 3.1% to sales growth during 2023, as compared to 2022, and is reflected as a component of the change in sales from existing businesses. Operating profit margin decreased 20 basis points during 2023 as compared to 2022. Year-over-year changes in operating profit margin comparisons were comprised of the following: •Year-over-year sales increases in price from existing businesses and gains from productivity measures were offset by unfavorable product mix, reductions in volume, higher employee compensation, and other operating expenses — unfavorable 5 basis points •The year-over-year effect of amortization from existing businesses — favorable 20 basis points 35 Table of Contents •The year-over-year net effect of acquisition-related transaction costs which were incurred in 2022 — favorable 65 basis points •The year-over-year effect of divested businesses, including amortization, and acquisition-related fair value adjustments to inventory — favorable 20 basis points •The year-over-year effect of costs relating to the discrete restructuring plan in 2023 — unfavorable 120 basis points COST OF SALES AND GROSS PROFIT [[GREPCENT_TABLE]] [["","For the Year Ended December 31"],["($ in millions)","2023","","2022"],["Sales","$","6,065.3","","","$","5,825.7"],["Cost of sales","(2,471.2)","","","(2,462.3)"],["Gross profit","3,594.1","","","3,363.4"],["Gross profit margin","59.3","%","","57.7","%"]] [[/GREPCENT_TABLE]] The year-over-year increase in gross profit during 2023 as compared to 2022 is due to year-over-year increases in price and volume, productivity measures and FBS initiatives, all partially offset by higher employee compensation costs, restructuring charges and foreign exchange rates. OPERATING EXPENSES [[GREPCENT_TABLE]] [["","For the Year Ended December 31"],["($ in millions)","2023","","2022"],["Sales","$","6,065.3","","","$","5,825.7"],["Selling, general, and administrative (\u201cSG&A\u201d) expenses","2,062.6","","","1,956.6"],["Research and development (\u201cR&D\u201d) expenses","397.8","","","401.5"],["Russia exit and wind down costs","\u2014","","","17.9"],["SG&A as a % of sales","34.0","%","","33.6","%"],["R&D as a % of sales","6.6","%","","6.9","%"]] [[/GREPCENT_TABLE]] SG&A expenses increased during 2023 as compared to 2022 due to increased employee compensation expenses, customer acquisition and marketing costs, and restructuring costs, partially offset by savings from productivity measures. R&D expenses, consisting principally of internal and contract engineering personnel costs, decreased slightly during 2023 as compared to 2022 due to favorable timing of project expenditures, partially offset by higher compensation costs. RUSSIA EXIT AND WIND DOWN COSTS In February 2022, Russian forces invaded Ukraine 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. 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 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. The exit activities were completed in 2022. INTEREST COSTS For a discussion of our outstanding indebtedness, refer to Note 10 to the accompanying consolidated financial statements. Net interest expense was $123.5 million during 2023, compared to $98.3 million during 2022. The year-over-year interest expense increase was due to higher interest rates incurred on floating rate debt instruments, despite overall lower debt balance levels carried during the year. 36 Table of Contents 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 2015 to 2023. 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. 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. 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 Organization for Economic Co-Operation and Development (the “OECD”) and could significantly increase our tax provision, cash taxes paid, and effective tax rate in future years. The OECD has issued significant global tax policy changes that include both expanded reporting as well as technical global tax policy changes. During 2021, an agreed framework and model rules for a global minimum corporate tax rate of fifteen percent (15%) was released by the OECD. Many countries in which we operate have implemented legislation to align with model rules and with effective dates spanning from 2024 through 2025. The Company will continue to monitor and evaluate the impact of OECD policy changes as foreign jurisdictions continue to adopt OECD guidance. 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, 2023 and 2022 Our effective tax rate for the years ended December 31, 2023 and 2022 was 12.6% and 13.5%, respectively. Our effective tax rate for 2023 differs from the U.S. federal statutory rate of 21% due primarily to the positive and negative effects of the Tax Cuts and Jobs Act (“TCJA”), U.S. federal permanent differences, the impacts of credits and deductions provided by law, including those associated with state income taxes, a decrease in our uncertain tax positions, and the effect of changes in tax rates enacted in the current period. COMPREHENSIVE INCOME Comprehensive income increased by $251 million in 2023 as compared to 2022, primarily due to a favorable change in foreign currency translation adjustments of $188 million, an increase in net income of $111 million, and unfavorable changes in pension benefit adjustments of $48 million. 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 37 Table of Contents 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, 2023, an increase of 100 basis points in interest rates would have decreased the fair value of our fixed-rate long-term debt by approximately $78 million. As of December 31, 2023, 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 10 to the consolidated financial statements for information regarding our outstanding indebtedness as of December 31, 2023). As a result, our primary interest rate exposure results from changes in short-term interest rates. As these shorter duration 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 5.15% with interest expense of $83 million. On an annualized basis, a hypothetical 10 basis points increase in market interest rates as of December 31, 2023 on our variable-rate debt obligations as of December 31, 2023 would have increased our interest expense by approximately $2.2 million in 2023. 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) (“AOCI”) component of equity. A 10% depreciation in major currencies relative to the U.S. dollar as of December 31, 2023 would have resulted in a reduction of foreign currency-denominated net assets and stockholders’ equity of approximately $186 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 AOCI as an offset to the foreign currency translation adjustments on our investments in foreign subsidiaries. For the years ended December 31, 2023 and 2022, we recognized after-tax losses of $1.2 million and $5.1 million, respectively, in Other comprehensive income (loss) related to the net investment hedges. Currency exchange rates unfavorably impacted 2023 reported sales by 0.6% as compared to 2022, as the U.S. dollar was, on average, stronger against most major currencies during 2023 as compared to exchange rate levels during 2022. In the fourth quarter of 2023, the U.S. dollar was, on average, weaker against most major currencies. If the exchange rates in effect as of December 31, 2023 were to prevail throughout 2024, currency exchange rates would positively impact 2024 estimated sales by approximately 0.3% relative to our performance in 2023. 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 38 Table of Contents 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 available cash, our revolving credit facility, and access to commercial paper, bank loans, and capital markets, will be sufficient to allow us to continue funding and investing in our existing businesses, consummate strategic acquisitions, make interest and principal payments on our outstanding indebtedness, fulfill our contractual obligations, and manage our capital structure on a short and long-term basis. We have generally satisfied any short-term liquidity needs that are not met through operating cash flows and available cash through issuances of commercial paper under our U.S. dollar and Euro-denominated commercial paper programs (“Commercial Paper Programs”). Credit support for the Commercial Paper Programs is provided by a five-year $2.0 billion senior unsecured revolving credit facility that expires on October 18, 2027 (the “Revolving Credit Facility”) which, to the extent not otherwise providing credit support for the commercial paper programs, can also be used for working capital and other general corporate purposes. As of December 31, 2023, no borrowings were outstanding under the Revolving Credit Facility. The availability of the Revolving Credit Facility as a standby liquidity facility to repay maturing commercial paper is an important factor in maintaining the existing credit ratings of the Commercial Paper Programs when we have outstanding borrowings. We expect to limit any future borrowings under the Revolving Credit Facility to amounts that would leave sufficient credit available under the facility to allow us to borrow, if needed, and repay any outstanding commercial paper as it matures. Our ability to access the commercial paper market, and the related costs of these borrowings, is affected by the strength of our credit rating and market conditions. Any downgrade in our credit rating would increase the cost of borrowing under our commercial paper programs and the Credit Agreement, and could limit or preclude our ability to issue commercial paper. If our access to the commercial paper market is adversely affected due to a downgrade, change in market conditions, or otherwise, we would expect to rely on a combination of available cash, operating cash flow, and the Revolving Credit Facility to provide short-term funding. In such event, the cost of borrowings under the Revolving Credit Facility could be higher than the historic cost of commercial paper borrowings. On June 7, 2023, we filed with the SEC an “automatic shelf” registration statement (the “Shelf Registration Statement”). Under the Shelf Registration Statement, we may from time to time sell shares of common stock, preferred stock, debt securities, depositary shares, purchase contracts, purchase units, warrants and subscription rights in one or more offerings. For additional information regarding the Company’s recent registered offering of €500 million aggregate principal amount of our 3.7% Euro-denominated senior unsecured notes due 2026 and €700 million aggregate principal amount of our 3.7% Euro-denominated senior unsecured notes due 2029, refer to Note 10 to the Consolidated Financial Statements. We continue to monitor the financial markets, the stability of U.S and international banks and general global economic conditions. If changes in financial markets or other areas of the economy adversely affect our access to the capital markets and other financing sources, we would expect to rely on a combination of available cash and existing available capacity under our credit facilities to provide short-term funding. 39 Table of Contents Overview of Cash Flows and Liquidity Following is an overview of our cash flows and liquidity: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["($ in millions)","2023","","2022"],["Net cash provided by operating activities","$","1,353.6","","","$","1,303.2"],["Cash paid for acquisitions, net of cash received","$","(95.8)","","","$","(12.8)"],["Payments for additions to property, plant and equipment","(107.8)","","","(95.8)"],["Proceeds from sale of property","7.4","","","\u2014"],["Proceeds from sale of business","\u2014","","","9.6"],["All other investing activities","0.8","","","(3.5)"],["Net cash used in investing activities","$","(195.4)","","","$","(102.5)"],["Proceeds from borrowings (maturities longer than 90 days), net of issuance costs","$","549.3","","","$","1,394.1"],["Net proceeds from commercial paper borrowings","839.9","","","38.5"],["Payment of 0.875% convertible senior notes due 2022","\u2014","","","(1,156.5)"],["Repurchase of common shares","(272.9)","","","(442.9)"],["Repayment of borrowings (maturities greater than 90 days)","(1,000.0)","","","(1,000.0)"],["Payment of common stock cash dividend to shareholders","(102.0)","","","(99.5)"],["All other financing activities","18.0","","","(6.7)"],["Net cash provided by (used in) financing activities","$","32.3","","","$","(1,273.0)"]] [[/GREPCENT_TABLE]] Operating Activities Operating cash flows can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, interest, pension funding, and other items impact reported cash flows. Operating cash flows were approximately $1.4 billion in 2023, representing an increase of $50 million, or approximately 3.9%, as compared to 2022, and primarily attributable to the following factors: •Year-over-year increases of $112 million in Operating cash flow from net earnings, net of non-cash items (Amortization, Depreciation, Stock-based compensation, and Russia exit and wind down costs incurred in 2022). •The aggregate changes in accounts receivable, inventories, and trade accounts payable used $9 million of cash during 2023 compared to using $11 million of cash during 2022. 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 $74 million of cash in 2023 as compared to using $10 million in 2022. The year-over-year changes were driven by timing differences in tax payments and employee compensation and benefits. Investing Activities Investing cash outflows consist primarily of cash paid for acquisitions and capital expenditures. Net cash used in investing activities was approximately $195 million during 2023 compared to approximately $103 million of net cash used in 2022, respectively. The increase in investing cash outflow during 2023 as compared to 2022 was primarily due to a year-over-year increase of $83 million in cash used for acquisitions, net of cash acquired and a $12 million increase in capital expenditures. Capital expenditures are made primarily for increasing production capacity, replacing aged equipment, supporting product development initiatives for hardware and software offerings, improving information technology systems, and purchasing equipment used in revenue arrangements with customers. Capital expenditures totaled $108 million in 2023 and $96 million in 2022. We expect capital spending to be between approximately $100 million and $120 million in 2024, though actual expenditures will ultimately depend on business conditions. 40 Table of Contents Financing Activities and Indebtedness Financing cash flows consist primarily of cash flows associated with the issuance and repayments of debt and commercial paper, payments of cash dividends to shareholders. Financing activities from continuing operations generated cash of $32 million in 2023, and used cash of $1.3 billion in 2022. Financing activities during 2023 reflected the following transactions: •On December 7, 2023, we entered into a term loan credit agreement, which provides for a 364-days delayed draw term loan facility up to an aggregate principal amount of $1.3 billion. On December 14, 2023, we drew down $550 million of the $1.3 billion delayed-draw senior unsecured term facility (“Delayed-Draw Term Loan due 2024”) as a Term Secured Overnight Financing Rate (“Term SOFR”) Loan. The repayment of the principal is due on December 12, 2024. •We borrowed $840 million in net commercial paper under the U.S. dollar-denominated commercial paper program. •On August 24, 2023, we repaid $250 million in outstanding principal of the Delayed-Draw Term Loan due 2023. On December 14, 2023, we repaid the remaining $750 million in outstanding principal and accrued interest thereon using the proceeds from the Delayed-Draw Term Loan due 2024 and available cash. •We repurchased 4 million shares of our common stock for approximately $273 million under our share repurchase program. •Dividend payments to common shareholders totaling $102 million. Financing activities 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 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. •We increased borrowings by $39 million in net commercial paper under the U.S. dollar-denominated commercial paper program. As of December 31, 2023, the commercial paper borrowings had a weighted average annual effective rate of 4.80% and a weighted average maturity of approximately 32 days. •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. •We repurchased 7 million shares of our outstanding common stock for approximately $443 million under our publicly-announced share repurchase program. •Dividend payments to common shareholders totaling $99.5 million. 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, 2023 was approximately $3.6 billion. We had $2.0 billion available under the Revolving Credit Facility as of December 31, 2023. 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, 2023 and 2022, we had $1.3 billion and $405.0 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. Refer to Note 10 to the Consolidated Financial Statements for additional information regarding the Company’s financing activities and indebtedness, including the Company’s outstanding debt as of December 31, 2023, financing activities subsequent to December 31, 2023, the Company’s commercial paper program, and the Revolving Credit Facility. Refer to Note 16 to the Consolidated Financial Statements for a description of the Company’s share repurchase program. 41 Table of Contents Dividends On November 2, 2023, we declared a regular quarterly dividend of $0.08 per common share paid on December 29, 2023 to holders of record on November 24, 2023. Cash and Cash Requirements Cash As of December 31, 2023, we held approximately $1.9 billion of cash and cash equivalents that were invested in highly liquid investment-grade instruments with a maturity of 90 days or less and yielded insignificant interest income during 2023. Approximately 35.0% of the $1.9 billion in cash and cash equivalents was held outside of the United States. Subsequent to December 31, 2023 we used available cash to fund our acquisition of EA Elektro-Automatik Holding GmbH (“EA”) which closed on January 3, 2024. Refer to Note 3 to the Consolidated Financial Statements for additional information regarding the EA acquisition. We have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our pension plans as required, pay dividends to shareholders, and support other business needs or objectives. With respect to our cash requirements, we generally intend to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions and repayment of maturing debt, we may also borrow under our commercial paper programs or credit facilities or enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under our commercial paper programs. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions. Foreign cumulative earnings remain subject to foreign remittance taxes. We have made an election regarding the amount of earnings that we do not intend to repatriate due to local working capital needs, local law restrictions, high foreign remittance costs, previous investments in physical assets and acquisitions, or future growth needs. For most of our foreign operations, we make an assertion regarding the amount of earnings in excess of intended repatriation that are expected to be held for indefinite reinvestment. No provisions for foreign remittance taxes have been made with respect to earnings that are planned to be reinvested indefinitely. The amount of foreign remittance taxes that may be applicable to such earnings is not readily determinable given local law restrictions that may apply to a portion of such earnings, unknown changes in foreign tax law that may occur during the applicable restriction periods caused by applicable local corporate law for cash repatriation, and the various tax planning alternatives we could employ if we repatriated these earnings. 42 Table of Contents Cash Requirements The following table sets forth a summary of our short-term and long-term cash requirements as of December 31, 2023 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. [[GREPCENT_TABLE]] [["($ in millions)","Total","","Due within one year of December 31, 2023","","Due later than one year from December 31, 2023"],["Debt and leases:"],["Long-term debt principal payments (a)","$","3,656.9","","","$","550.0","","","$","3,106.9"],["Interest payments on long-term debt (b)","729.8","","","172.0","","","557.8"],["Operating lease obligations (c)","183.7","","","42.2","","","141.5"],["Other:"],["Purchase obligations (d)","487.6","","","355.2","","","132.4"],["Other liabilities reflected on the balance sheet under GAAP (e)(f)","2,167.8","","","1,145.1","","","1,022.7"],["Total","$","7,225.8","","","$","2,264.5","","","$","4,961.3"],["(a) The amount due within one year of December 31, 2023 is related to the Delayed Draw Term Loan due 2024. Refer to Note 10 to the Consolidated Financial Statements for additional information regarding the Company\u2019s indebtedness as of December 31, 2023."],["(b) Interest payments on long-term debt are projected for future periods using the interest rates in effect as of December 31, 2023. Certain of these projected interest payments may differ in the future based on changes in market interest rates."],["(c) Includes future lease payments for operating leases having initial noncancelable lease terms in excess of one year."],["(d) Consist of agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions, and the approximate timing of the transaction."],["(e) Primarily consist of obligations under product service and warranty policies and allowances, performance and operating cost guarantees, estimated environmental remediation costs, self-insurance and litigation claims, post-retirement benefits, pension benefit obligations, net tax liabilities, deferred compensation obligations, and the deferred payment related to the 2023 acquisitions. The timing of cash flows associated with these obligations is based upon management\u2019s estimates over the terms of these arrangements and is largely based upon historical experience."],["(f) Includes non-contractual obligations of $207 million of noncurrent gross unrecognized tax benefits. However, the timing of these liabilities is uncertain, and therefore, they have been included in the \u201cdue later than one year from December 31, 2023\u201d column. The amounts also include our obligation under the TCJA for the transition tax on cumulative foreign earnings and profits, which we expect to pay over eight years. Refer to Note 13 to the consolidated financial statements for additional information on unrecognized tax benefits."]] [[/GREPCENT_TABLE]] 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 $46 million in commitments expire within one year of December 31, 2023 and $11 million later than one year from December 31, 2023. During 2023, we contributed $1 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 $9 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. As of December 31, 2023 we expect to have sufficient liquidity to satisfy our cash needs for the foreseeable future, including our cash needs in the United States. CRITICAL ACCOUNTING ESTIMATES 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 43 Table of Contents 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. 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 6 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 2023, we performed goodwill impairment testing for our reporting units. Reporting units that include 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 2023 annual impairment test, the carrying value of goodwill in each reporting unit ranged from $180.0 million to $5.6 billion. Our annual goodwill impairment analysis in 2023 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 60% to approximately 801%. 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 44% to approximately 711%. 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 for intangible assets with definite lives 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. We evaluated events or circumstances that may indicate the carrying value of our intangible assets may not be fully recoverable during the year ended December 31, 2023, and recorded no material impairments. 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. 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 44 Table of Contents 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 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. Pension: For a description of our pension accounting practices, refer to Note 11 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 2023 would have increased the net obligation by approximately $16 million from the amounts recorded in the financial statements as of December 31, 2023. 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 1.50% to 6.47%. If the expected long-term rate of return on plan assets during 2023 was reduced by 50 basis points, pension expense in 2023 would have increased by approximately $0.9 million ($0.8 million on an after-tax basis). Income Taxes: For a description of our income tax accounting policies, refer to Note 2 and Note 13 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 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 13 to the consolidated financial statements). We review our global tax positions on a 45 Table of Contents 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 2023 effective tax rate of 1.0% would have resulted in an additional income tax provision for the year ended December 31, 2023 of approximately $10 million. NEW ACCOUNTING STANDARDS For a discussion of new accounting standards relevant to our businesses, refer to Note 2 to the consolidated financial statements.