# Vontier Corp (VNT) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Vontier Corp's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1786842/000178684223000011/vnt-20221231.htm Accession: 0001786842-23-000011 Filing date: 2023-02-17 Report date: 2022-12-31 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/VNT/ All MD&A years: /company/VNT/mda/ Previous year: /company/VNT/mda/fy2021/ (FY 2021) Next year: /company/VNT/mda/fy2023/ (FY 2023) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management and is intended to help the reader understand the results and operations and financial condition of the Company. Our MD&A should be read in conjunction with our Consolidated and Combined Financial Statements and the accompanying Notes to the Financial Statements included elsewhere in this Annual Report. Discussion and analysis of our financial condition and results of operations as of and for the year ended December 31, 2021 compared to December 31, 2020 is included under the heading “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2021 with the Securities and Exchange Commission on February 24, 2022. OVERVIEW General Vontier is a global industrial technology company at the forefront of solving next-generation mobility challenges. Guided by the Vontier Business System and an unwavering commitment to our customers, we deliver smart, sustainable solutions for the road ahead by focusing on critical technical equipment, components, and software and services for manufacturing, repair and servicing in the mobility ecosystem worldwide. We supply a wide range of solutions spanning advanced environmental sensors; fueling equipment; field payment hardware; point-of sale, workflow and monitoring software; vehicle tracking and fleet management; software solutions for traffic light control; and vehicle mechanics’ and technicians’ equipment. We market our products and services to retail and commercial fueling operators, convenience store and in-bay car wash operators, tunnel car wash businesses, commercial vehicle repair businesses, municipal governments and public safety entities and fleet owners/operators on a global basis. Refer to “Item 1. Business – General” included in this Annual Report for a discussion of our strategies for delivering long-term shareholder value. Business Performance Vontier experienced broad-based organic growth across its platforms and geographies during the year ended December 31, 2022, despite challenging global macroeconomic conditions, as total sales increased 6.5% during the year ended December 31, 2022. The increase in total sales was primarily driven by a 6.5% increase from our recent acquisitions and a 2.6% increase in sales from existing businesses, partially offset by changes in foreign currency exchange rates which negatively impacted our sales growth by 2.6% during the year ended December 31, 2022 as compared to the prior year. Outlook We expect overall sales and sales from existing businesses to decline on a year-over-year basis in 2023 due to the lower rate of demand related to the end of the upgrade cycle for enhanced credit card security requirements for outdoor payment systems based on the EMV global standards. Excluding this impact, we expect sales from existing businesses to increase mid single digits. Our outlook is subject to various assumptions and risks, including but not limited to the resilience and durability of the economies of the United States and other critical regions, ongoing challenges with global logistics and supply chain including the availability of electronic components, the impact of the COVID-19 pandemic, the impact of the Russia-Ukraine conflict, market conditions in key end product segments, and the impact of energy disruption in Europe. Additional uncertainties are identified in “Information Relating to Forward-Looking Statements” in this Form 10-K. We continue to monitor the macroeconomic and geopolitical conditions which may impact our business, including the COVID-19 pandemic, monetary and fiscal policies, international trade and relations between the U.S., China and other nations, and investment and taxation policy initiatives being considered in the United States and by the Organization for Economic Co-operation and Development. We also continue to monitor the Russia-Ukraine Conflict and the impact on our business and operations. As of the filing date of this report, we do not believe they are material. 26 Table of Contents RESULTS OF OPERATIONS Comparison of Results of Operations [[GREPCENT_TABLE]] [["","Year Ended"],["($ in millions)","December 31, 2022","","December 31, 2021"],["Total sales","$","3,184.4","","","$","2,990.7"],["Total cost of sales","(1,756.1)","","","(1,657.6)"],["Gross profit","1,428.3","","","1,333.1"],["Operating costs:"],["Selling, general and administrative expenses (\u201cSG&A\u201d)","(705.8)","","","(621.6)"],["Research and development expenses (\u201cR&D\u201d)","(144.6)","","","(129.3)"],["Operating profit","$","577.9","","","$","582.2"],["Gross profit as a % of sales","44.9","%","","44.6","%"],["SG&A as a % of sales","22.2","%","","20.8","%"],["R&D as a % of sales","4.5","%","","4.3","%"],["Operating profit as a % of sales","18.1","%","","19.5","%"]] [[/GREPCENT_TABLE]] Components of Sales Growth [[GREPCENT_TABLE]] [["","2022 vs 2021"],["Total sales growth (GAAP)","6.5","%"],["Existing businesses (Non-GAAP)(a)","2.6","%"],["Acquisitions (Non-GAAP)","6.5","%"],["Currency exchange rates (Non-GAAP)","(2.6)","%"],["(a) The impact of price increases is reflected as a component of the change in sales."]] [[/GREPCENT_TABLE]] Total sales within our mobility technologies platform increased high single digits during the year ended December 31, 2022 as compared to the prior year. This increase was driven by high single digit growth from our recent acquisitions and low single digit growth from our existing businesses, partially offset by a low single digit decrease due to the impact of currency translation. Our existing businesses in our mobility technologies platform experienced growth from price increases, as well as strong demand across the alternative energy and environmental and aftermarket businesses, which were partially offset by the lower rate of demand related to the end of the upgrade cycle for enhanced credit card security requirements for outdoor payment systems based on the EMV global standards as well as the end of the Mexico fiscal regulation upgrades. Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased low single digits during the year ended December 31, 2022 as compared to the prior year, driven primarily by growth from price increases and continued strong demand across most product categories, most notably hardline and powered tools, which were partially offset by a decrease from the discontinuance of our wheel weights product line. Cost of Sales Cost of sales increased $98.5 million, or 5.9%, during the year ended December 31, 2022, as compared to the prior year, primarily due to our recent acquisitions as well as increased costs from inflationary pressures. Gross Profit Gross profit increased $95.2 million, or 7.1%, during the year ended December 31, 2022, as compared to the prior year, primarily due to our recent acquisitions and the net impact of the Company’s price increases offset by increased costs due to inflationary pressures. Gross profit margin increased slightly during the year ended December 31, 2022, as compared to the prior year. 27 Table of Contents Operating Costs and Other Expenses SG&A expenses increased $84.2 million, or 13.5%, during the year ended December 31, 2022, as compared to the prior year and as a percentage of sales, increased 140 basis points during the same period. This increase was primarily driven by SG&A expenses from our recent acquisitions, as well as a $35.6 million increase in intangible asset amortization expense and a $21.9 million increase in transaction- and deal-related costs during the year ended December 31, 2022, as compared to the prior year. R&D expenses (consisting principally of internal and contract engineering personnel costs) increased $15.3 million, or 11.8%, during the year ended December 31, 2022, as compared to the prior year, primarily due to the impact of our recent acquisitions. R&D expense as a percentage of sales was relatively flat during the year ended December 31, 2022, as compared to the prior year. Operating Profit Operating profit decreased $4.3 million, or 0.7%, during the year ended December 31, 2022, as compared to the prior year, and operating profit margins decreased 140 basis points during the same period. This decrease was primarily due to the increase in gross profit, offset by the increases in SG&A expenses and R&D expenses, as discussed above. NON-GAAP FINANCIAL MEASURES Sales from Existing Businesses We define sales from existing businesses as total sales excluding (i) sales from acquired and certain divested businesses; (ii) the impact of currency translation; and (iii) certain other items. •References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to certain divested businesses or product lines not considered discontinued operations. •The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales from acquired businesses) and (b) the period-to-period change in sales, including foreign operations, (excluding sales from acquired businesses) after applying the current period foreign exchange rates to the prior year period. •The portion of sales attributable to other items is calculated as the impact of those items which are not directly correlated to sales from existing businesses which do not have an impact on the current or comparable period. Sales from existing businesses should be considered in addition to, and not as a replacement for or superior to, total sales, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting the non-GAAP financial measure of sales from existing businesses provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our sales performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisitions and certain divestiture-related items because the nature, size and number of such transactions can vary dramatically from period to period and between us and our peers. We exclude the effect of currency translation and certain other items from sales from existing businesses because these items are either not under management’s control or relate to items not directly correlated to sales from existing businesses. Management believes the exclusion of these items from sales from existing businesses may facilitate assessment of underlying business trends and may assist in comparisons of long-term performance. References to sales volume refer to the impact of both price and unit sales. INTEREST COSTS Interest expense, net was $69.6 million during the year ended December 31, 2022 as compared to $47.8 million during the prior year, an increase of $21.8 million, driven primarily by higher average debt balances during the year and the impact of increases in interest rates on our variable-rate debt obligations. For a discussion of our outstanding indebtedness, refer to Note 11. Financing to the Consolidated and Combined Financial Statements. 28 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. Our effective tax rate can be affected by, among other items, changes in the mix of earnings in countries with differing statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities and changes in tax laws. We are routinely examined by various domestic and international taxing authorities. The amount of income taxes we pay is subject to audit by federal, state and foreign tax authorities, which may result in proposed assessments. The Company is subject to examination in the United States, various states and foreign jurisdictions. We review our global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary. Pursuant to U.S. tax law, the Company’s initial U.S. federal income tax return for the post-separation period was filed in October 2021. We filed our first full year U.S. federal income tax return for 2021 with the Internal Revenue Service (“IRS”) in October 2022. The IRS has not yet begun an examination of the Company. The Company remains subject to tax audit for its separate company tax returns in various U.S. states for the tax years 2011 to 2021. Our operations in certain foreign jurisdictions remain subject to routine examination for the tax years 2009 to 2021. On August 16, 2022, the Inflation Reduction Act (the “IRA”) was signed into law, effective January 1, 2023. The IRA implements, among other provisions, a new 15% corporate alternative minimum tax on corporations with over $1 billion of financial statement income and a new 1% excise tax on the aggregate fair market value of stock repurchased by public corporations. We will not be subject to the 15% corporate alternative minimum tax. We anticipate being subject to the 1% excise tax on stock repurchases, however, we do not expect it to have a significant impact on our consolidated financial position. We will continue to monitor as new guidance becomes available. For a description of our income tax accounting policies, refer to Note 2. Basis of Presentation and Summary of Significant Accounting Policies and Note 15. Income Taxes to the Consolidated and Combined Financial Statements. Comparison of the Years Ended December 31, 2022 and 2021 Our effective tax rate for the years ended December 31, 2022 and 2021 was 23.9% and 22.7%, respectively. Our effective tax rate for 2022 differs from the U.S. federal statutory rate of 21.0% due primarily to the effect of recurring items including state taxes, foreign derived intangible income, and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, there was a favorable impact related to non-taxable income. Our effective tax rate for 2021 differs from the U.S. federal statutory rate of 21.0% due primarily to the effect of recurring items including state taxes, foreign derived intangible income, and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, there was a favorable impact related to non-taxable income. COMPREHENSIVE INCOME Comprehensive income decreased by $75.2 million during the year ended December 31, 2022, as compared to the prior year, primarily due to unfavorable changes in foreign currency translation adjustments of $63.7 million. Comprehensive income for the year ended December 31, 2022 includes a gain on previously held equity interests from combination of business of $32.7 million which relates to a gain recognized on our interest in Driivz prior to acquiring the remaining outstanding shares. Refer to Note 3. Acquisitions to the Consolidated and Combined Financial Statements for additional information on our acquisition of Driivz. Additionally, during the year ended December 31, 2022, we recognized an unrealized loss on equity securities measured at fair value of $8.7 million and a realized loss of $3.1 million. Refer to Note 8. Fair Value Measurements to the Consolidated and Combined Financial Statements for additional information on our investments. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT We are exposed to market risk from changes in interest rates, foreign currency exchange rates, credit risk and commodity prices, each of which could impact our financial statements. We generally address our exposure to these risks through our normal operating and financing activities. In addition, our broad-based business activities help to reduce the impact that volatility in any particular area or related areas may have on our operating profit as a whole. 29 Table of Contents Interest Rate Risk We are exposed to interest rate risk through fluctuations in interest rates on our debt obligations. As of December 31, 2022, we had $1.0 billion outstanding of debt that was subject to variable interest rates. As a result, increases in interest rates could increase the cost of servicing our debt and could materially reduce our profitability and cash flows. We seek to manage exposure to adverse interest rate changes through our normal operating and financing activities. A hypothetical 100 basis points increase in market interest rates as of December 31, 2022 on our variable-rate debt obligations as of December 31, 2022 would increase our annual interest expense by approximately $10.0 million. Foreign Currency Exchange Rate Risk We face transactional exchange rate risk from transactions with customers in countries outside of the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than our functional currency or the functional currency of an applicable subsidiary. We also face translational exchange rate risk related to the translation of financial statements of our foreign operations into U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. The effect of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the accumulated other comprehensive income component of equity. A 10% change in major currencies relative to the U.S. dollar as of December 31, 2022 would have resulted in an impact to equity of approximately $88 million. Currency exchange rates negatively impacted reported sales for the year ended December 31, 2022 by 2.6% as compared to the prior year, as the U.S. dollar was, on average, stronger against most major currencies during the year ended December 31, 2022 as compared to exchange rate levels during the prior year. If the exchange rates in effect as of December 31, 2022 were to prevail throughout the year ended December 31, 2023, currency exchange rates would negatively impact estimated sales for the year ended December 31, 2023 by less than 1% compared to the year ended December 31, 2022. In general, weakening of the U.S. dollar against other major currencies would positively impact our sales and results of operations on an overall basis and strengthening of the U.S. dollar against other major currencies would adversely impact our sales and results of operations. We have generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this risk. Both positive and negative movements in currency exchange rates against the U.S. dollar will therefore continue to affect the reported amount of sales, profit, and assets and liabilities in our Consolidated and Combined Financial Statements. Credit Risk We are exposed to potential credit losses in the event of nonperformance by counterparties to our financial instruments. Financial instruments that potentially subject us to credit risk consist of cash and highly-liquid investment grade cash equivalents, and receivables from customers and franchisees. We place cash and cash equivalents with various high-quality financial institutions throughout the world and exposure is limited at any one institution. Although we typically do not obtain collateral or other security to secure these obligations, we regularly monitor third party depository institutions that hold our cash and cash equivalents. We emphasize safety and liquidity of principal over yield on those funds. Concentrations of credit risk arising from receivables from customers are limited due to the diversity of our customers. We perform credit evaluations of our customers’ financial conditions and also obtain collateral or other security as appropriate. Notwithstanding these efforts, the current distress in the global economy may increase the difficulty in collecting receivables. The assumptions used in evaluating our exposure to credit losses associated with our financing receivables portfolio involve estimates and significant judgment. Holding other estimates constant, a hypothetical 100 basis points increase in the expected loss rate on the financing receivables portfolio would have resulted in an increase in the allowance for credit losses of approximately $5.0 million as of December 31, 2022. No customer accounted for more than 10% of sales during all periods presented. Commodity Price Risk For a discussion of risks relating to commodity prices, refer to “Item 1A. Risk Factors.” 30 Table of Contents LIQUIDITY AND CAPITAL RESOURCES We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. We generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity will be sufficient to allow us to continue to invest in existing businesses, consummate strategic acquisitions, make interest payments on our outstanding indebtedness, and manage our capital structure on a short and long-term basis. Refer also to Note 11. Financing to the Consolidated and Combined Financial Statements for additional information. 2022 Financing and Capital Transactions During the year ended December 31, 2022, we completed the following financing and capital transactions: •Entered into and settled a $250.0 million accelerated share repurchase program under which we received 10.0 million shares; •Repurchased 3.7 million shares in the open market; •Entered into a three-year, $600.0 million senior unsecured delayed-draw term loan on October 28, 2022 and drew down the full $600.0 million on December 30, 2022; and •With the proceeds received from the draw, we repaid our $600.0 million two-year term loan that was due on September 13, 2023. Our long-term debt requires, among others, that we maintain certain financial covenants, and we were in compliance with all of these covenants as of December 31, 2022. Refer to Note 11. Financing to the Consolidated and Combined Financial Statements for more information related to our long-term indebtedness and to Note 19. Capital Stock and Earnings Per Share to the Consolidated and Combined Financial Statements for more information related to our share repurchases. Overview of Cash Flows and Liquidity Following is an overview of our cash flows and liquidity: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["($ in millions)","2022","","2021"],["Net cash provided by operating activities","$","321.2","","","$","481.1"],["Cash paid for acquisitions, net of cash received","$","(277.5)","","","$","(955.8)"],["Payments for additions to property, plant and equipment","(60.0)","","","(47.8)"],["Proceeds from sale of property","0.4","","","\u2014"],["Cash paid for equity investments","(11.8)","","","(11.3)"],["Proceeds from sale of equity securities","19.0","","","\u2014"],["Cash received for settlement of investment","\u2014","","","7.2"],["Net cash used in investing activities","$","(329.9)","","","$","(1,007.7)"],["Proceeds from issuance of long-term debt","$","1,167.0","","","$","2,186.5"],["Repayment of long-term debt","(1,167.0)","","","(1,400.0)"],["Net proceeds from (repayments of) short-term borrowings","0.4","","","(7.0)"],["Payments for debt issuance costs","(0.8)","","","(5.1)"],["Payments of common stock cash dividend","(15.9)","","","(12.7)"],["Purchases of treasury stock","(328.0)","","","\u2014"],["Proceeds from stock option exercises","2.5","","","7.5"],["Acquisition of noncontrolling interest","\u2014","","","(1.9)"],["Net transfers to Former Parent","\u2014","","","(35.6)"],["Other financing activities","(6.1)","","","(6.2)"],["Net cash (used in) provided by financing activities","$","(347.9)","","","$","725.5"]] [[/GREPCENT_TABLE]] 31 Table of Contents Operating Activities Cash flows from operating activities can fluctuate significantly from period to period as working capital needs and the timing of payments for income taxes, restructuring activities and other items impact reported cash flows. Cash flows from operating activities were $321.2 million during the year ended December 31, 2022, a decrease of $159.9 million as compared to the prior year. The year-over-year change in operating cash flows was primarily attributable to the following factors: •The aggregate of accounts receivable and long-term financing receivables used $76.9 million of operating cash flows during the year ended December 31, 2022 as compared to using $4.2 million in the prior year. The amount of cash flow generated from or used by accounts receivable depends upon how effectively we manage the cash conversion cycle and can be significantly impacted by the timing of collections in a period. Additionally, when we originate certain financing receivables, we assume the financing receivable by decreasing the franchisee’s trade accounts receivable. As a result, originations of certain financing receivables are non-cash transactions. •The aggregate of other operating assets and liabilities used $93.1 million of cash during the year ended December 31, 2022 as compared to using $6.6 million in the prior year. This difference is due primarily to working capital needs and the timing of accruals and payments and tax-related amounts. Investing Activities Net cash used in investing activities decreased by $677.8 million during the year ended December 31, 2022 as compared to the prior year, primarily due to a decrease in the cash paid for acquisitions. Refer to Note 3. Acquisitions to the Consolidated and Combined Financial Statements for discussion of our acquisitions during the years ended December 31, 2022 and 2021. We made capital expenditures of approximately $60.0 million and $47.8 million during the years ended December 31, 2022 and 2021, respectively. Financing Activities Net cash used in financing activities was $347.9 million during the year ended December 31, 2022, driven primarily by repurchases of the Company’s common stock of $328.0 million. We also refinanced $600.0 million of our term loans and made borrowings and repayments under our revolving credit facility, which had net zero impact to financing activities during the year ended December 31, 2022. Net cash provided by financing activities was $725.5 million during the year ended December 31, 2021, driven primarily by the issuance of $1.6 billion of notes and the receipt of $600.0 million of proceeds from our delayed-draw term loan, which was partially offset by the repayment of $1.4 billion of Term Loans. Share Repurchase Program Refer to Note 19. Capital Stock and Earnings Per Share to the Consolidated and Combined Financial Statements for a description of the Company’s stock repurchase program. Dividends We paid regular quarterly cash dividends of $0.025 per share during the year ended December 31, 2022. The declaration of future cash dividends is at the discretion of our Board of Directors and will depend upon, among other things, our future earnings, cash flows, capital requirements, financial condition and general business conditions. Supplemental Guarantor Financial Information As of December 31, 2022, we had $1.6 billion in aggregate principal amount of the Notes and $1.0 billion in aggregate principal amount outstanding of the Term Loans. Our obligations to pay principal and interest on the Notes and Term Loans are fully and unconditionally guaranteed on a joint and several basis on an unsecured, unsubordinated basis by the Guarantors. Our other subsidiaries do not guarantee any such indebtedness (collectively, “Non-Guarantor Subsidiaries”). Refer to Note 11. Financing to the Consolidated and Combined Financial Statements for additional information regarding the terms of our Notes and the Term Loans. The Notes and the guarantees thereof are the Company’s and the guarantors’ senior unsecured obligations and: •rank without preference or priority among themselves and equally in right of payment with our existing and any future unsecured and unsubordinated indebtedness, including, without limitation, indebtedness under our credit agreement; •are senior in right of payment to any of our existing and future indebtedness that is subordinated to the notes; •are effectively subordinated to any of our existing and future secured indebtedness to the extent of the assets securing such indebtedness; and 32 Table of Contents •are structurally subordinated to all existing and any future indebtedness and any other liabilities of our non-Guarantor Subsidiaries. The following tables present summarized financial information for Vontier Corporation and the Guarantor Subsidiaries on a combined basis and after the elimination of (a) intercompany transactions and balances between Vontier Corporation and the Guarantor Subsidiaries and (b) equity in earnings from and investments in the Non-Guarantor Subsidiaries. [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["Summarized Results of Operations Data ($ in millions)","2022"],["Net sales (a)","$","1,725.9"],["Gross profit (b)","851.6"],["Net income (c)","$","546.6"],["(a) Includes intercompany sales of $97.8 million for the year ended December 31, 2022."],["(b) Includes intercompany gross profit of $28.8 million for the year ended December 31, 2022."],["(c) Includes intercompany pretax income of $99.1 million for the year ended December 31, 2022."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","As of December 31,"],["Summarized Balance Sheet Data ($ in millions)","2022"],["Assets"],["Current assets","$","428.0"],["Intercompany receivables","1,099.3"],["Noncurrent assets","612.7"],["Total assets","$","2,140.0"],["Liabilities"],["Current liabilities","$","378.7"],["Intercompany payables","286.6"],["Noncurrent liabilities","2,642.8"],["Total liabilities","$","3,308.1"]] [[/GREPCENT_TABLE]] Cash and Cash Requirements As of December 31, 2022, we held approximately $204.5 million of cash and cash equivalents that were held in either operating accounts or invested in highly liquid investment-grade instruments with a maturity of 90 days or less with an annual effective rate generally around 4.0% as of December 31, 2022. Approximately 60% of our cash was held outside of the United States. We have made an assertion regarding the amount of earnings that we do not intend to repatriate due to local working capital needs, local law restrictions, high foreign remittance costs, previous investments in physical assets and acquisitions, or future growth needs. Such earnings are intended for indefinite foreign reinvestment and no provision for income taxes has been made. The amount of income taxes that may be applicable to such earnings is not readily determinable given the unknown duration of local law restrictions as applicable to such earnings, unknown changes in foreign tax law that may occur during the restriction periods, and the various alternatives we could employ if we repatriated these earnings. The cash that our foreign subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. We have cash requirements to support working capital needs, capital expenditures, pay interest and service debt, pay taxes and any related interest or penalties, fund our restructuring activities and pension plans as required and support other business needs or objectives. Refer to Note 10. Leases and Note 11. Financing to the Consolidated and Combined Financial Statements for further details on our contractual obligations and the timing of expected future payments under our lease and debt agreements, respectively. We also have purchase obligations which consist of agreements to purchase goods or services that are enforceable and legally binding on us and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. As of December 31, 2022, we had purchase obligations of $246.3 million, with $228.6 million payable in the next 12 months. 33 Table of Contents With respect to our cash requirements, we generally intend to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions, we may also borrow under our credit facilities, enter into new credit facilities and borrow directly thereunder and/or access the capital markets. As of December 31, 2022, we had $750.0 million of borrowing capacity under our revolving credit facility. We also may from time to time access the capital markets, including to take advantage of favorable interest rate environments or other market conditions. As of December 31, 2022, we believe that we have sufficient liquidity to satisfy our cash needs. Guarantees As of December 31, 2022 and 2021, the Company had guarantees consisting primarily of outstanding standby letters of credit, bank guarantees, and performance and bid bonds of $84.0 million and $92.6 million, respectively. These guarantees have been provided in connection with certain arrangements with vendors, customers, financing counterparties, and governmental entities to secure the Company’s obligations and/or performance requirements related to specific transactions. The Company believes that if the obligations under these instruments were triggered, they would not have a material effect on the financial statements. LEGAL PROCEEDINGS Refer to Note 17. Litigation and Contingencies to the Consolidated and Combined Financial Statements for information regarding legal proceedings, contingencies, and guarantees. For a discussion of risks related to legal proceedings and contingencies, refer to “Item 1A. Risk Factors.” CRITICAL ACCOUNTING ESTIMATES Management’s discussion and analysis of our financial condition and results of operations is based upon our Consolidated and Combined Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience, the current economic environment and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates and judgments. We believe the following accounting estimates are most critical to an understanding of our financial statements. Estimates are considered to be critical if they meet both of the following criteria: (i) the estimate requires assumptions about material matters that are uncertain at the time the estimate is made, and (ii) material changes in the estimate are reasonably likely from period to period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 2. Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated and Combined Financial Statements. Accounts and Financing Receivables We maintain allowances for credit losses to reflect expected credit losses inherent in our portfolio of receivables. Determination of the allowances requires us to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the allowances and, therefore, net earnings. The allowances for credit losses represent management’s best estimate of the credit losses expected from our trade accounts and financing receivables portfolios over the remaining contractual life. We pool assets with similar risk characteristics for this measurement based on attributes that may include asset type, duration, and/or credit risk rating. The future expected losses of each pool are estimated based on numerous quantitative and qualitative factors reflecting management’s estimate of collectability over the remaining contractual life of the pooled assets, including: •portfolio duration; •historical, current, and forecasted future loss experience by asset type; •historical, current, and forecasted delinquency and write-off trends; •historical, current, and forecasted economic conditions; and •historical, current, and forecasted credit risk. We regularly perform detailed reviews of our accounts receivable and financing receivables portfolios to determine if changes in the aforementioned qualitative and quantitative factors have impacted the adequacy of the allowances. Inventories We record inventory at the lower of cost or net realizable value, which is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. We estimate the net realizable value of inventory based on assumptions of future demand and related pricing. Estimating the net realizable value of inventory is inherently uncertain because levels of demand, technological advances and pricing competition in many of our markets can fluctuate significantly from period to 34 Table of Contents period due to circumstances beyond our control. If actual market conditions are less favorable than those projected, we could be required to reduce the value of our inventory, which would adversely impact our financial statements. Goodwill and Other Intangible Assets Goodwill and other intangible assets result from our acquisition of existing businesses. In accordance with accounting standards related to business combinations, neither goodwill nor indefinite-lived intangible assets are amortized; however, certain definite-lived identifiable intangible assets, primarily customer relationships, acquired technology and trade names, are amortized over their estimated useful lives. Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities. We assess the goodwill of each of our reporting units for impairment at least annually as of the first day of the fourth quarter or more frequently if events and circumstances indicate that goodwill may not be recoverable. When evaluating for impairment, the Company may first perform a qualitative assessment to determine whether it is more likely than not that a reporting unit or indefinite-lived intangible asset is impaired. If the Company does not perform a qualitative assessment, or if it determines that it is not more likely than not that the fair value of the reporting unit or indefinite-lived intangible asset exceeds its carrying amount, the Company will calculate the estimated fair value of the reporting unit or indefinite-lived intangible asset. The Company’s decision to perform a qualitative impairment assessment for an individual reporting unit in a given year is influenced by a number of factors, inclusive of the size of the reporting unit's goodwill, the significance of the excess of the reporting unit's estimated fair value over carrying value at the last quantitative assessment date, the amount of time in between quantitative fair value assessments and the date of acquisition. As part of our 2022 annual impairment analysis, we elected to apply the qualitative goodwill impairment assessment guidance in ASC 350-20, Goodwill, for all 7 of our reporting units, or approximately $1.8 billion of goodwill as of the assessment date (which includes reporting units that are held for sale). Factors we consider in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying value of the net assets of our reporting units, information related to market multiples of peer companies and other relevant entity specific events. Based on our assessment we determined on the basis of the qualitative and quantitative factors, that the fair values of the reporting units were more likely than not greater than their respective carrying values; and therefore, a quantitative test was not required. If we do not perform a qualitative assessment, goodwill impairment is determined by using a quantitative approach. We identify potential impairment by comparing the fair value of each reporting unit, determined using various valuation techniques, with the primary technique being a discounted cash flow analysis, to its carrying value. If the carrying amount of the reporting unit exceeds the fair value, an impairment loss is recognized. A non-cash goodwill impairment charge of $85.3 million was recorded against our Telematics reporting unit as a result of our quantitative impairment assessment on March 27, 2020. No goodwill impairment charges were recorded for the years ended December 31, 2022 and 2021. Refer to Note 7. Goodwill and Other Intangible Assets to the Consolidated and Combined Financial Statements for additional information regarding the Telematics impairment charge. We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment loss occurred requires a comparison of the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. We also test intangible assets with indefinite lives at least annually for impairment. In these analyses management considers general macroeconomic conditions, industry and market conditions, cost factors, financial performance and other entity and asset specific events and may require management to make judgments and estimates about future revenues, expenses, market conditions and discount rates related to these assets. If actual results are not consistent with management’s estimates and assumptions, goodwill and other intangible assets may be overstated, and a charge would need to be taken against net earnings which would adversely affect our financial statements. Contingent Liabilities We are, from time to time, subject to a variety of litigation and similar contingent liabilities incidental to our business or the business operations of previously owned entities. We recognize a liability for any contingency that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending and future claims. In addition, outside risk insurance professionals may assist in the determination of reserves for incurred but not yet reported claims through evaluation of our specific loss history, actual claims reported, and industry trends among statistical and other factors. Reserve estimates are adjusted as additional information regarding a claim becomes known. If the reserves established with respect to these contingent liabilities are 35 Table of Contents inadequate, we would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our financial statements. Revenue Recognition We derive revenues from the sale of products and services. For revenue related to a product or service to qualify for recognition, we must have an enforceable contract with a customer that defines the goods or services to be transferred and the payment terms related to those goods or services. Further, collection of substantially all consideration for the goods or services transferred must be probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a combination of financial and qualitative factors, including the customers’ financial condition, collateral, debt-servicing ability, past payment experience and credit bureau information. Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are considered in determining the transaction price for the contract. Significant judgment is exercised in determining product returns, customer allowances and rebates, which are estimated based on historical experience and known trends. Certain customer arrangements include multiple performance obligations, typically hardware, installation, training, consulting, services and/or post-contract customer support (“PCS”). The Company allocates the contract transaction price to each performance obligation using the observable price that the good or service sells for separately in similar circumstances and to similar customers, and/or a residual approach when the observable selling price of a good or service is not known and is either highly variable or uncertain. Allocating the transaction price to each performance obligation may require judgment. If our judgments regarding revenue recognition prove incorrect, our reported revenues in particular periods may be adversely affected. Historically, our estimates of revenue have been materially correct. Stock-Based Compensation Determining the appropriate fair value model and calculating the fair value of stock option awards require subjective assumptions, including the expected life of the awards, stock price volatility, dividend rate and expected forfeiture rate. For our performance stock units (“PSUs”), we make assumptions, which are reviewed on a quarterly basis, regarding the probability of achieving the relevant performance conditions. We estimate expected forfeitures of equity awards at the date of grant and recognize compensation expense only for those awards expected to vest. Our forfeiture assumption is revised if actual forfeitures differ from those estimates. The assumptions used in calculating the fair value of stock-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of judgment. If actual results are not consistent with our assumptions and estimates, our stock-based compensation expense could be materially different in the future. Income Taxes In accordance with GAAP, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax return in future years for which the tax benefit has already been reflected in our Consolidated and Combined Statements of Earnings and Comprehensive Income. We establish valuation allowances for our deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. This requires the Company to make judgments and estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income and the impact of tax planning strategies. We provide for unrecognized tax benefits when, based upon the technical merits, it is “more-likely-than-not” that an uncertain tax position will not be sustained upon examination. Judgment is required in evaluating tax positions and determining income tax provisions. We re-evaluate the technical merits of our tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (i) a tax audit is completed; (ii) applicable tax laws change, including a tax case ruling or legislative guidance; or (iii) the applicable statute of limitations expires. We recognize potential accrued interest and penalties associated with unrecognized tax positions in income tax expense. Business Combinations Accounting for business combinations requires management to make significant estimates and assumptions, especially at the acquisition date, for intangible assets. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based, in part, on historical experience and information obtained from management of the acquired companies and are inherently uncertain. Critical estimates in valuing certain of the intangible assets we have acquired include, but are not limited 36 Table of Contents to, estimates about future results such as revenues, margin, net working capital and other valuation assumptions such as useful lives, royalty rates, attrition rates and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results. Corporate Allocations We have historically operated as part of Fortive and not as a stand-alone company. Accordingly, certain shared costs have been allocated to us and are reflected as expenses in the accompanying Consolidated and Combined Financial Statements from January 1, 2020 through the date of the Separation. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the related expenses attributable to us for purposes of the carved-out financial statements; however, the expenses reflected in these financial statements may not be indicative of the actual expenses that would have been incurred during the periods presented if we had operated as a separate stand-alone entity. In addition, the expenses reflected in the financial statements may not be indicative of expenses that will be incurred in the future by us. NEW ACCOUNTING STANDARDS Refer to Note 2. Basis of Presentation and Summary of Significant Accounting Policies to the Consolidated and Combined Financial Statements for information regarding new accounting standards.