NOTE 6.7. SALES
Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.
Contract Assets
In certain circumstances, we record contract assets which include unbilled amounts typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is subject to contractual performance obligations and not only subject to the passage of time. Contract assets were $10.5$10.3 million and $9.0 million as of April 2,October 1, 2021 and December 31, 2020, respectively, and are included in Prepaid expenses and other current assets.
Contract Costs
We incur direct incremental costs to obtain certain contracts, typically sales-related commissions and costs associated with assets used by our customers in certain service arrangements. As of April 2,October 1, 2021 and December 31, 2020, we had $78.2$76.3 million and $81.2 million, respectively, in net revenue-related capitalized contract costs primarily related to assets used by our customers in certain software contracts, which are recorded in Prepaid expenses and other current assets, for the current portion, and Other assets, for the noncurrent portion, in the accompanying Consolidated Condensed Balance Sheets. These assets have estimated useful lives between 3 and 5 years and are amortized on a straight-line basis.
Impairment losses recognized on our revenue-related contract assets were insignificant during the three and nine months ended April 2, 2021.October 1, 2021 and September 25, 2020.
Contract Liabilities
The Company’s contract liabilities consist of deferred revenue generally related to post contract support (“PCS”) and extended warranty sales. In these arrangements, the Company generally receives up-front payment and recognizes revenue over the support term of the contracts. Deferred revenue is classified as current or noncurrent based on the timing of when revenue is expected to be recognized and is included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in the accompanying Consolidated Condensed Balance Sheets.
The Company’s contract liabilities consisted of the following:
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($ in millions) | April 2, 2021 | | December 31, 2020 |
Deferred revenue - current | $ | 96.8 | | | $ | 87.6 | |
Deferred revenue - noncurrent | 57.1 | | | 58.3 | |
Total contract liabilities | $ | 153.9 | | | $ | 145.9 | |
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($ in millions) | October 1, 2021 | | December 31, 2020 |
Deferred revenue - current | $ | 120.8 | | | $ | 87.6 | |
Deferred revenue - noncurrent | 59.4 | | | 58.3 | |
Total contract liabilities | $ | 180.2 | | | $ | 145.9 | |
During the three and nine months ended April 2,October 1, 2021, we recognized $23.2$11.9 million and $51.1 million of revenue related to the Company’s contract liabilities at December 31, 2020. The change in contract liabilities from December 31, 2020 to April 2,October 1, 2021 was primarily due to the acquisition of DRB and inclusion of the acquired contract liabilities as well as the timing of cash receipts and sales of PCS and extended warranty services.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm, noncancelable orders and the annual contract value for software-as-a-service contracts with expected customer delivery dates beyond one year from April 2,October 1, 2021 for which work has not been performed. The Company has excluded performance obligations with an original expected duration of one year or less. Performance obligations as of April 2,October 1, 2021 are $399.4$385.1 million, the majority of which are related to the annual contract value for software-as-a-service contracts. The Company expects approximately 35 percent of the remaining performance obligations will be fulfilled within the next two years, 65 percent within the next three years, and substantially all within four years.
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by sales of products and services, geographic location, solution and major product group, as it best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Disaggregation of revenue for the three months ended April 2, 2021 and March 27, 2020 werewas as follows:
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($ in millions) | April 2, 2021 | | March 27, 2020 |
Sales: | | | |
Sales of products | $ | 644.6 | | | $ | 547.5 | |
Sales of services | 62.8 | | | 61.7 | |
Total | $ | 707.4 | | | $ | 609.2 | |
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Geographic: | | | |
North America (a) | $ | 508.5 | | | $ | 438.4 | |
Western Europe | 55.0 | | | 57.9 | |
High growth markets | 111.8 | | | 86.2 | |
Rest of world | 32.1 | | | 26.7 | |
Total | $ | 707.4 | | | $ | 609.2 | |
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Solution: | | | |
Retail fueling hardware | $ | 196.5 | | | $ | 179.2 | |
Auto repair | 164.7 | | | 137.7 | |
Service and other recurring revenue | 123.9 | | | 103.3 | |
Environmental | 61.6 | | | 53.2 | |
Retail solutions | 91.4 | | | 68.5 | |
Software-as-a-service | 47.0 | | | 45.6 | |
Smart cities | 8.3 | | | 7.6 | |
E-mobility | 0.8 | | | 2.3 | |
Other | 13.2 | | | 11.8 | |
Total | $ | 707.4 | | | $ | 609.2 | |
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Major Product Group: | | | |
Mobility technologies | $ | 516.9 | | | $ | 448.9 | |
Diagnostics and repair technologies | 190.5 | | | 160.3 | |
Total | $ | 707.4 | | | $ | 609.2 | |
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| Three Months Ended | | Nine Months Ended |
($ in millions) | October 1, 2021 | | September 25, 2020 | | October 1, 2021 | | September 25, 2020 |
Sales: | | | | | | | |
Sales of products | $ | 699.7 | | | $ | 686.0 | | | $ | 2,005.1 | | | $ | 1,713.9 | |
Sales of services | 68.8 | | | 60.7 | | | 195.4 | | | 175.7 | |
Total | $ | 768.5 | | | $ | 746.7 | | | $ | 2,200.5 | | | $ | 1,889.6 | |
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Geographic: | | | | | | | |
North America (a) | $ | 547.0 | | | $ | 539.9 | | | $ | 1,568.2 | | | $ | 1,348.3 | |
Western Europe | 68.7 | | | 63.7 | | | 191.3 | | | 176.6 | |
High growth markets | 115.8 | | | 111.7 | | | 337.1 | | | 279.5 | |
Rest of world | 37.0 | | | 31.4 | | | 103.9 | | | 85.2 | |
Total | $ | 768.5 | | | $ | 746.7 | | | $ | 2,200.5 | | | $ | 1,889.6 | |
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Solution: | | | | | | | |
Retail fueling hardware | $ | 243.6 | | | $ | 225.5 | | | $ | 648.9 | | | $ | 562.4 | |
Auto repair | 156.1 | | | 145.5 | | | 485.2 | | | 382.9 | |
Service and other recurring revenue | 118.0 | | | 116.2 | | | 361.4 | | | 315.0 | |
Environmental | 73.3 | | | 61.7 | | | 198.4 | | | 162.6 | |
Retail solutions | 96.4 | | | 122.3 | | | 285.1 | | | 256.8 | |
Software-as-a-service | 45.7 | | | 45.1 | | | 139.2 | | | 134.5 | |
Smart cities | 9.6 | | | 8.9 | | | 26.7 | | | 23.4 | |
E-mobility | 4.7 | | | 5.7 | | | 8.1 | | | 12.2 | |
Other | 21.1 | | | 15.8 | | | 47.5 | | | 39.8 | |
Total | $ | 768.5 | | | $ | 746.7 | | | $ | 2,200.5 | | | $ | 1,889.6 | |
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Major Product Group: | | | | | | | |
Mobility technologies | $ | 588.6 | | | $ | 578.6 | | | $ | 1,641.6 | | | $ | 1,441.6 | |
Diagnostics and repair technologies | 179.9 | | | 168.1 | | | 558.9 | | | 448.0 | |
Total | $ | 768.5 | | | $ | 746.7 | | | $ | 2,200.5 | | | $ | 1,889.6 | |
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(a) Includes sales in the United States of $494.2$526.7 million and $424.9$525.5 million for the three months ended April 2,October 1, 2021 and March 27,September 25, 2020, respectively, and sales in the United States of $1,513.3 million and $1,309.2 million for the nine months ended October 1, 2021 and September 25, 2020, respectively.
NOTE 7.8. INCOME TAXES
Our effective tax rate for the three and nine months ended April 2,October 1, 2021 was 23.6%19.6% and 22.2%, respectively, as compared to 119.7%20.9% and 29.0% for the three and nine months ended March 27, 2020.September 25, 2020, respectively. The year-over-year decrease in the effective tax rate for the three months ended April 2,October 1, 2021 as compared to the comparable period in the prior year was primarily due to an increase in non-taxable income. The year-over-year decrease in the effective tax rate for the nine months ended October 1, 2021 as compared to the comparable period in the prior year was primarily due to a non-deductible book goodwill impairment recognized in the threenine months ended March 27,September 25, 2020.
Our effective tax rate for both periods in 2021 and 2020 differs from the U.S. federal statutory rate of 21% due primarily to the effect of state taxes and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, inSpecific to the nine months ended September 25, 2020, there was an unfavorable impact related to a non-deductible book goodwill impairment.
NOTE 8.9. LEASES
Operating lease cost was $5.9$5.3 million and $5.2 million for both the three months ended April 2,October 1, 2021 and March 27,September 25, 2020. For the nine months ended October 1, 2021 and September 25, 2020, operating lease cost was $15.8 million and $15.6 million, respectively. During the three month periodsnine months ended April 2,October 1, 2021 and March 27,September 25, 2020, cash paid for operating leases included in operating cash flows was $4.9$14.1 million and $4.7$14.7 million, respectively. Right-of-use assets obtained in exchange for operating lease obligations were $3.4$15.7 million and insignificant$11.5 million for the threenine months ended April 2,October 1, 2021 and March 27,September 25, 2020, respectively.
NOTE 9.10. LITIGATION AND CONTINGENCIES
Warranty
We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warrantied against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from ninety days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of the Company’s accrued warranty liability:
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($ in millions) | |
Balance, December 31, 2020 | $ | 54.6 | |
Accruals for warranties issued during the period | 11.424.3 | |
Settlements made | (10.7)(26.5) | |
Additions due to acquisition | 0.5 | |
Effect of foreign currency translation | (0.1) | |
Balance, April 2,October 1, 2021 | $ | 55.352.8 | |
Litigation and Other Contingencies
LitigationThe Company is involved in legal proceedings from time to time in the ordinary course of its business. Although the outcome of such matters is uncertain, management believes that these legal proceedings will not have a material adverse effect on the financial condition or results of future operations of the Company.
In accordance with accounting guidance, the Company records a liability in the Consolidated and Combined Condensed Financial Statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss does not meet the known or probable level but is reasonably possible and a loss or range of loss can be reasonably estimated, the estimated loss or range of loss is disclosed. These
Our reserves consist of specific reserves for individual claims and additional amounts for anticipated developments of these claims as well as for incurred but not yet reported claims. The specific reserves for individual known claims are quantified with the assistance of legal counsel and outside risk insurance professionals where appropriate. 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. While we actively pursue financial recoveries from insurance providers, the Company does not recognize any recoveries until realized or until such time as a sustained pattern of collections is established related to historical matters of a similar nature and magnitude. If the risk insurance reserves the Company has established are inadequate, we would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our net earnings.
In connection with the recognition of liabilities for asbestos related matters, the Company records insurance recoveries that are deemed probable and estimable. In assessing the probability of insurance recovery, we make judgments concerning insurance
coverage that we believe are reasonable and consistent with our historical dealings, our knowledge of any pertinent solvency issues surrounding insurers, and litigation and court rulings potentially impacting coverage. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in the analysis of probable recoveries. Projecting future events is subject to various uncertainties, including litigation and court rulings potentially impacting coverage, that could cause insurance recoveries on asbestos related liabilities to be higher or lower than those projected and recorded. Given the inherent uncertainty in making future projections, the Company reevaluates projections concerning the Company’s probable insurance recoveries considering any changes to the projected liabilities, the Company’s recovery experience or other relevant factors that may impact future insurance recoveries.
We recorded gross liabilities associated with known and future expected asbestos claims of $67.4$68.1 million and $68.0 million as of April 2,October 1, 2021 and December 31, 2020, respectively. Known and future expected asbestos claims of $16.9$15.8 million and $17.5
million are included in Accrued expenses and other current liabilities on the Consolidated Condensed Balance Sheets as of April 2,October 1, 2021 and December 31, 2020, respectively. Known and future expected asbestos claims of $52.3 million and $50.5 million are included in Other long-term liabilities on the Consolidated Condensed Balance Sheets as of both April 2,October 1, 2021 and December 31, 2020, respectively.
We recorded the related projected insurance recoveries of $35.9$33.2 million and $36.0 million as of April 2,October 1, 2021 and December 31, 2020, respectively. InsuranceProjected insurance recoveries in the accompanying Consolidated Condensed Balance Sheets as of April 2,October 1, 2021 include $10.7$8.0 million in Prepaid expenses and other current assets and $25.2 million in Other assets. InsuranceProjected insurance recoveries in the accompanying Consolidated Condensed Balance Sheets as of December 31, 2020 include $10.8 million in Prepaid expenses and other current assets and $25.2 million in Other assets.
Guarantees
As of April 2,October 1, 2021 and December 31, 2020, we had guarantees consisting primarily of outstanding standby letters of credit, bank guarantees, and performance and bid bonds of approximately $102.5$91.6 million and $84.5 million, respectively. These guarantees have been provided in connection with certain arrangements with vendors, customers, financing counterparties, and governmental entities to secure our obligations and/or performance requirements related to specific transactions. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations.
Refer to Note 4.5. Financing for information regarding guarantees of the Notes by certain of our wholly-owned subsidiaries.
NOTE 10.11. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where our assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:
•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation.
•Level 3 inputs are unobservable inputs based on our assumptions.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Below is a summary of financial liabilities that are measured at fair value on a recurring basis as of:
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($ in millions) | Quoted Prices in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
April 2, 2021 | | | | | | | |
Deferred compensation liabilities | $ | 0 | | | $ | 4.6 | | | $ | 0 | | | $ | 4.6 | |
December 31, 2020 | | | | | | | |
Deferred compensation liabilities | $ | 0 | | | $ | 3.7 | | | $ | 0 | | | $ | 3.7 | |
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($ in millions) | Quoted Prices in Active Market (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
October 1, 2021 | | | | | | | |
Deferred compensation liabilities | $ | — | | | $ | 4.5 | | | $ | — | | | $ | 4.5 | |
December 31, 2020 | | | | | | | |
Deferred compensation liabilities | $ | — | | | $ | 3.7 | | | $ | — | | | $ | 3.7 | |
Certain management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and benefits accrual included in Other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (“401(k) Programs”) (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of our common stock). Changes in the
deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates.
Other Investments
The Company holds a minority interest in Tritium Holdings Pty, Ltd (“Tritium”) of $52.8$52.1 million, which is recorded in Other assets on the Consolidated Condensed Balance Sheets at cost. The Company has elected to use the measurement alternative for equity investments without readily determinable fair values and evaluate this investment for indicators of impairment quarterly. The Company did not identify events or changes in circumstances that may have a significant effect on the fair value of the investment during the three and nine months ended April 2,October 1, 2021. During the threenine months ended April 2,October 1, 2021, we made an additional investmentinvestments in Tritium of $6.8 million and reduced our investment by $3.8 million.million due to the settlement of our call option.
Nonrecurring Fair Value Measurements
Certain assets and liabilities are carried on the accompanying Consolidated Condensed Balance Sheets at cost and are not remeasured to fair value on a recurring basis. These assets include finite-lived intangible assets, which are tested when a triggering event occurs, and goodwill and identifiable indefinite-lived intangible assets, which are tested for impairment at least annually as of the first day of the fourth quarter or more frequently if events and circumstances indicate that the asset may not be recoverable.
As of April 2,October 1, 2021, assets carried on the balance sheet and not remeasured to fair value on a recurring basis were $1.1$1.7 billion of goodwill and $241.1$631.5 million of identifiable intangible assets, net.
Refer to Note 4.5. Financing for information related to the fair value of the Company’s borrowings.
NOTE 11.12. RELATED-PARTY TRANSACTIONS
In connection with the Separation, we entered into the Agreements with Fortive which govern the Separation and provide a framework for the relationship between the parties going forward, including an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, an FBS license agreement and a transition services agreement.
Employee Matters Agreement
The employee matters agreement sets forth, among other things, the allocation of assets, liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the Separation, including the treatment of outstanding equity and other incentive awards and certain retirement and welfare benefit obligations.
Tax Matters Agreement
The tax matters agreement governs the respective rights, responsibilities and obligations of both Fortive and Vontier after the Separation with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes.
Intellectual Property Matters Agreement
The intellectual property matters agreement sets forth the terms and conditions pursuant to which Fortive and Vontier have mutually granted certain personal, generally irrevocable, non-exclusive, worldwide, and royalty-free rights to use certain intellectual property. Both parties are able to sublicense their rights in connection with activities relating to their businesses, but not for independent use by third parties.
FBS License Agreement
The FBS license agreement sets forth the terms and conditions pursuant to which Fortive has granted a non-exclusive, worldwide, non-transferable, perpetual license to us to use FBS solely in support of our businesses. We are able to sublicense such license solely to direct and indirect wholly-owned subsidiaries.
Transition Services Agreement (“TSA”)
The TSA sets forth the terms and conditions pursuant to which Vontier and our subsidiaries and Fortive and its subsidiaries will provide to each other various services after the Separation. The services to be provided include information technology, facilities, certain accounting and other financial functions, and administrative services. The charges for the transition services
generally are expected to allow the providing company to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the service, plus, in some cases, the allocated indirect costs of providing the services, generally without profit.
TSA Payments
In accordance with the TSA, receipts from Fortive were immaterial during the three and nine months ended April 2,October 1, 2021. During the threenine months ended April 2,October 1, 2021, we made net payments to Fortive of $48.5 million, whichmillion. Net payments during the nine months ended October 1, 2021 included approximately $30 million of our share of the transaction taxes related to the Separation. Payments made during the three months ended October 1, 2021 were not significant.
Allocations of Expenses Prior to the Separation
The Company has historically operated as part of Fortive and not as a stand-alone company. Accordingly, certain shared costs have been allocated to the Company by Fortive, and are reflected as expenses in these financial statements. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the related expenses attributable to the Company for purposes of the carve-out financial statements; however, the expenses reflected in the accompanying Combined Condensed Financial Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if the Company had operated as a separate stand-alone entity and the expenses that will be incurred in the future by the Company.
The amountamounts of related party expenses allocated to the Company from Fortive and its subsidiaries for the three and nine months ended March 27,September 25, 2020, were as follows:
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($ in millions) | | | | | | | |
Allocated corporate expenses | | | $ | 10.6 | | | | | |
Directly attributable expenses: | | | | | | | |
Insurance programs expenses | | | 0.6 | | | | | |
Medical insurance programs expenses | | | 11.3 | | | | | |
Deferred compensation program expenses | | | 0.3 | | | | | |
Total related-party expenses | | | $ | 22.8 | | | | | |
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| | | Three Months Ended | | | | Nine Months Ended |
($ in millions) | | | September 25, 2020 | | | | September 25, 2020 |
Allocated corporate expenses | | | $ | 9.5 | | | | | $ | 28.0 | |
Directly attributable expenses: | | | | | | | |
Insurance programs expenses | | | 0.9 | | | | | 2.2 | |
Medical insurance programs expenses | | | 9.1 | | | | | 31.4 | |
Deferred compensation program expenses | | | 0.3 | | | | | 0.9 | |
Total related-party expenses | | | $ | 19.8 | | | | | $ | 62.5 | |
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Corporate Expenses
Certain corporate overhead and other shared expenses incurred by Fortive and its subsidiaries have been allocated to the Company and are reflected in the accompanying Combined Condensed Statements of Earnings (Loss) and Comprehensive Income (Loss) for the three and nine months ended March 27,September 25, 2020. These amounts include, but are not limited to, items such as general management and executive oversight, costs to support Vontier information technology infrastructure, facilities, compliance, human resources, and marketing, as well as legal functions and financial management and transaction processing, including public company reporting, consolidated tax filings, and tax planning, Fortive benefit plan administration, risk management and consolidated treasury services, certain employee benefits and incentives, and stock-based compensation administration. These costs have been allocated using a methodology that management believes is reasonable for the item being allocated. Allocation methodologies include the Company’s relative share of revenues, headcount, or functional spend as a percentage of the total. Following the Separation, we independently incur corporate overhead costs and no corporate overhead costs were allocated by Fortive.
Insurance Programs Administered by Fortive
In addition to the corporate allocations noted above, prior to the Separation, the Company was allocated expenses related to certain insurance programs Fortive administered on behalf of the Company, including automobile liability, workers’ compensation, general liability, product liability, director’s and officer’s liability, cargo, and property insurance. These amounts were allocated using various methodologies, as described below.
Included within the insurance cost allocation are amounts related to programs for which Fortive was self-insured up to a certain amount. For the self-insured component, costs were allocated to the Company based on its incurred claims. Fortive has premium-based policies that cover amounts in excess of the self-insured retentions. Prior to the Separation, the Company was allocated a portion of the total insurance cost incurred by Fortive based on its pro-rata portion of Fortive’s total underlying
exposure base. In connection with the Separation, we established similar independent self-insurance programs to support any outstanding claims going forward and no insurance costs were allocated by Fortive subsequent to the Separation.
Medical Insurance Programs Administered by Fortive
In addition to the corporate allocations noted above, the Company was allocated expenses related to the medical insurance programs administered on behalf of the Company. These amounts were allocated using actual medical claims incurred during the period for the employees attributable to the Company. In connection with the Separation, we established independent medical insurance programs similar to those previously provided by Fortive.
Deferred Compensation Program Administered by Fortive
Certain employees of the Company participated in Fortive’s nonqualified deferred compensation programs, which permitted officers, directors and certain management employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. Participants could have chosen among alternative earnings rates for the amounts they deferred, which were primarily based on investment options within Fortive’s 401(k) program (except that the earnings rates for amounts contributed unilaterally by Fortive were entirely based on changes in the value of Fortive’s common stock). All amounts deferred under this plan are unfunded, unsecured obligations of the Company. In connection with the Separation, we established a similar independent, nonqualified deferred compensation program.
Revenue and Other Transactions Entered into in the Ordinary Course of Business
Prior to the Separation, we operated as part of Fortive and not as a stand-alone company and certain of our revenue arrangements related to contracts entered into in the ordinary course of business with Fortive and its affiliates. Following the Separation, we continue to enter into arms-length revenue arrangements in the ordinary course of business with Fortive and its affiliates, although certain agreements were entered into or terminated as a result of the Separation.
After the secondary offering in January 2021, Fortive no longer owned any of the Company’s outstanding common stock and is not considered a related party. Refer to Note 1. Business Overview And Basis Of Presentation for information related to the secondary offering.
Certain of our revenue arrangements related to contracts entered into in the ordinary course of business with Fortive and its affiliates. Our revenue from sales to Fortive and its subsidiaries was insignificant during the three and nine months ended April 2, 2021 and March 27,September 25, 2020.
Purchases from Fortive and Fortive’s subsidiaries were immaterial during the three months ended April 2, 2021$4.0 million and were $3.6$11.9 million during the three and nine months ended March 27, 2020.September 25, 2020, respectively.
NOTE 12.13. CAPITALIZATION AND EARNINGS PER SHARE
Capital Stock
The Company’s authorized capital stock consists of 1,985,000,000 shares of common stock, par value $0.0001 per share, and 15,000,000 shares of preferred stock with 0no par value, all of which shares of preferred stock are undesignated.
Earnings Per Share
Basic earnings per share is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted earnings per share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans except where the inclusion of such shares would have an anti-dilutive impact.
Information related to the calculation of net earnings per share of common stock is summarized as follows:
| | | Three Months Ended | | Three Months Ended | | Nine Months Ended |
($ and shares in millions, except per share amounts) | ($ and shares in millions, except per share amounts) | April 2, 2021 | | March 27, 2020 | ($ and shares in millions, except per share amounts) | October 1, 2021 | | September 25, 2020 | | October 1, 2021 | | September 25, 2020 |
Numerator: | Numerator: | | | | Numerator: | | | | | | | |
Net earnings (loss) | $ | 91.0 | | | $ | (4.2) | | |
Net earnings | | Net earnings | $ | 127.3 | | | $ | 141.0 | | | $ | 300.6 | | | $ | 205.2 | |
| Denominator: | Denominator: | | Denominator: | |
Basic weighted average common shares outstanding | Basic weighted average common shares outstanding | 168.7 | | | 168.4 | | Basic weighted average common shares outstanding | 169.1 | | | 168.4 | | | 168.9 | | | 168.4 | |
Effect of dilutive stock options and RSUs | Effect of dilutive stock options and RSUs | 1.0 | | | 0 | | Effect of dilutive stock options and RSUs | 1.2 | | | — | | | 1.1 | | | — | |
Diluted weighted average common shares outstanding | Diluted weighted average common shares outstanding | 169.7 | | | 168.4 | | Diluted weighted average common shares outstanding | 170.3 | | | 168.4 | | | 170.0 | | | 168.4 | |
| Earnings (loss) per share: | | |
Earnings per share: | | Earnings per share: | |
Basic | Basic | $ | 0.54 | | | $ | (0.02) | | Basic | $ | 0.75 | | | $ | 0.84 | | | $ | 1.78 | | | $ | 1.22 | |
Diluted | Diluted | $ | 0.54 | | | $ | (0.02) | | Diluted | $ | 0.75 | | | $ | 0.84 | | | $ | 1.77 | | | $ | 1.22 | |
| Anti-dilutive shares | Anti-dilutive shares | 2.9 | | | 0 | | Anti-dilutive shares | 1.6 | | | — | | | 2.5 | | | — | |
The A&R Credit Agreement also made certain other changes to the Credit Agreement to address the discontinuation of LIBOR and its impact on U.S. dollar and multicurrency loans, as well as other immaterial changes. The Company’s two wholly-owned subsidiaries which were Guarantors under the Credit Agreement continue to be Guarantors under the A&R Credit Agreement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Vontier Corporation (“Vontier,” the “Company,” “we,” “us,” or “our”) is a global industrial technology company that focuses on critical technical equipment, components, software and services for manufacturing, repair, and servicing in the mobility infrastructure industry worldwide. The Company supplies a wide range of mobility technologies and diagnostics and repair technologies solutions spanning advanced environmental sensors,sensors; fueling equipment,equipment; field payment hardware, remote managementhardware; point-of sale, workflow and workflow software,monitoring software; vehicle tracking and fleet management software-as-servicemanagement; software solutions professionalfor traffic light control; and vehicle mechanics’ and technicians’ equipment and traffic priority control systems.equipment. The Company markets its 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.
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 the MD&A and Consolidated and Combined Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”).
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the United States federal securities laws.
Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date of the Report, document, press release, webcast, call, materials or other communication in which they are made. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include the following:
•The effect of the COVID-19 pandemic on our global operations and on the operations of our customers, suppliers, and vendors is having, and is expected to continue to have, a significant impact on our business and results of operations.
•Changes in, or status of implementation of, industry standards and governmental regulations, including interpretation or enforcement thereof, may reduce demand for our products or services, increase our expenses or otherwise adversely impact our business model.
•Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation.
•The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
•Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our financial statements and our business, including our reputation.
•International economic, political, legal, compliance, epidemic and business factors could negatively affect our financial statements.
•We may be required to recognize impairment charges for our goodwill and other intangible assets.
•We are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows.
•Our restructuring actions could have long-term adverse effects on our business.
•Our defined benefit pension plans are subject to financial market risks that could adversely affect our financial statements.
•As of the date of this quarterly report, we have outstanding indebtedness of approximately $2.0$2.6 billion and the ability to incur an additional $750.0 million of indebtedness under the Revolving Credit Facility, as defined above, and in
the future we may incur additional indebtedness, all of which could adversely affect our businesses and our ability to meet our obligations and pay dividends.
•We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
•Any inability to consummate acquisitions at our historical rates and at appropriate prices, and to make appropriate investments that support our long-term strategy, could negatively impact our growth rate and stock price.
•Our acquisition of businesses, investments, joint ventures and other strategic relationships could negatively impact our financial statements.
•Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
•Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements.
•Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations.
•If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies.
•Potential indemnification liabilities to Fortive pursuant to the Separation agreement could materially and adversely affect our businesses, financial condition, results of operations and cash flows. In addition, there can be no assurance that Fortive’s performance of its indemnity obligations to us under the separation agreement regarding certain liabilities will be sufficient.
•If there is a determination that the distribution, together with certain related transactions, is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying Fortive’s private letter ruling from the IRS or tax opinion are incorrect or for any other reason, then Fortive and its stockholders could incur significant U.S. federal income tax liabilities, and we could also incur significant liabilities.
•We may be affected by significant restrictions, including on our ability to engage in certain corporate transactions for a two-year period after the distribution in order to avoid triggering significant tax-related liabilities.
•Fortive may compete with us.
•We may not achieve some or all of the expected benefits of the Separation, and the Separation may adversely affect our businesses.
See “Item 1.A. Risk Factors” in our 2020 Annual Report on Form 10-K and Part II - Item 1A. Risk Factors” in this Form 10-Q for a further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. We do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
OVERVIEW
General
Vontier Corporation is a global industrial technology company that focuses on critical technical equipment, components, and software and services for manufacturing, repair and servicing in the mobility infrastructure industry worldwide. We supply a wide range of mobility technologies and diagnostics and repair technologies solutions spanning advanced environmental sensors,sensors; fueling equipment,equipment; field payment hardware, remote managementhardware; point-of-sale; workflow and workflow software,monitoring software; vehicle tracking and fleet management software-as-servicemanagement; software solutions professionalfor traffic light control; and vehicle mechanics’ and technicians’ equipment and traffic priority control systems.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.
Our research and development, manufacturing, sales, distribution, service and administrative operations are located in more than 30 countries across North America, Asia Pacific, Europe and Latin America. In addition, we sell our products in these countries and multiple other markets in these regions. 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.
BUSINESS PERFORMANCE AND OUTLOOK
Business Performance
While differences exist among our businesses, on an overall basis, demand for our hardware and software products and services increased during the three month periodand nine months ended April 2,October 1, 2021. As compared to the comparable periodperiods of 2020, aggregate year-over-year total sales increased 16.1%2.9% and 16.5% for the three and nine months ended April 2,October 1, 2021. Sales from existing businesses increased 14.3%0.8% and 14.1% during the three and nine months ended April 2,October 1, 2021, as compared to the comparable periodperiods in 2020.
The increase in total sales and sales from existing businesses during the three months ended April 2,October 1, 2021 was primarily driven by broad growthour diagnostics and repair portfolio which experienced strong demand across most product categories, most notably specialty and hardline tools, tool storage and diagnostics as well as the portfolio includingimpact of price increases by the Company across its portfolio. Our mobility technologies platform had continued strong demand for retail and environmental solutions continued strong demand for and shipments of fuel management systems in North America and dispenser and environmental deliveries in India but was impacted by the lower rate of demand related to the enhanced credit card security requirements for outdoor payment systems based on the Europay, Mastercard and Visa (“EMV”) global standards as well as the end of Mexico fiscal regulation upgrades. Changes in foreign currency exchange rates positively impacted our sales growth by 0.7% during the three months ended October 1, 2021 compared to the comparable period in 2020.
The increase in total sales and sales from existing businesses during the nine months ended October 1, 2021 was primarily driven by broad growth across the portfolio as well as the direct and indirect impacts of COVID-19 on the prior year comparable periods. Our mobility technologies platform had strong demand for retail and environmental solutions, Mexico regulatory demand and dispenser and environmental deliveries in India. Our diagnostics and repair portfolio also experienced strong demand across most product categories, most notably specialty and hardline tools.tools, tool storage and diagnostics. Additionally, our price increases across our portfolio increased revenue during the nine months ended October 1, 2021. Changes in foreign currency exchange rates positively impacted our sales growth by 1.8% during the threenine months ended April 2,October 1, 2021 compared to the comparable period in 2020.
In developed markets, year-over-year total sales for the three months ended October 1, 2021 increased at a rate in the low single digits and sales from existing businesses for the three months ended April 2,October 1, 2021 were up slightly, primarily due to growth in Western Europe. North America increased by low single digits including the impact of the acquisition of DRB. High growth markets grew at a rate in the low single digits primarily due to growth in India which was partially offset by declines in Latin America primarily due to the end of Mexico fiscal regulation upgrades.
In developed markets, year-over-year total sales and sales from existing businesses for the nine months ended October 1, 2021 increased at a rate in the mid-teens and low-double digits, respectively,mid teens which was primarily due to growth in North America at a rate in the mid-teens. This growth was partially offset by a decline in total sales and sales from existing businesses in Western Europe.America. High growth markets had a moregrew greater than 20% increase primarily due to growth in India and Latin America.
Outlook
We expect overall sales and sales from existing businesses to grow on a year-over-year basis in 2021; however, we are continuing to monitor the impact of the COVID-19 pandemic and geopolitical and regulatory uncertainties and the corresponding impact to our businesses in addition to the other factors identified above in “Information Relating to Forward- Looking Statements.”
RESULTS OF OPERATIONS
Comparison of Results of Operations
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
($ in millions) | April 2, 2021 | | March 27, 2020 | | | | |
Total sales | $ | 707.4 | | | $ | 609.2 | | | | | |
Total cost of sales | (395.6) | | | (346.1) | | | | | |
Gross profit | 311.8 | | | 263.1 | | | | | |
Operating costs: | | | | | | | |
Selling, general and administrative expenses ("SG&A") | (145.7) | | | (123.1) | | | | | |
Research and development expenses ("R&D") | (33.2) | | | (32.9) | | | | | |
Impairment of goodwill | — | | | (85.3) | | | | | |
Operating profit | $ | 132.9 | | | $ | 21.8 | | | | | |
| | | | | | | |
Gross profit as a % of sales | 44.1 | % | | 43.2 | % | | | | |
SG&A as a % of sales | 20.6 | % | | 20.2 | % | | | | |
R&D as a % of sales | 4.7 | % | | 5.4 | % | | | | |
Operating profit as a % of sales | 18.8 | % | | 3.6 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
($ in millions) | October 1, 2021 | | September 25, 2020 | | October 1, 2021 | | September 25, 2020 |
Total sales | $ | 768.5 | | | $ | 746.7 | | | $ | 2,200.5 | | | $ | 1,889.6 | |
Total cost of sales | (422.1) | | | (415.4) | | | (1,223.8) | | | (1,064.2) | |
Gross profit | 346.4 | | | 331.3 | | | 976.7 | | | 825.4 | |
Operating costs: | | | | | | | |
Selling, general and administrative expenses ("SG&A") | (147.8) | | | (121.1) | | | (458.1) | | | (356.0) | |
Research and development expenses ("R&D") | (31.2) | | | (31.6) | | | (97.3) | | | (93.7) | |
Impairment of goodwill | — | | | — | | | — | | | (85.3) | |
Operating profit | $ | 167.4 | | | $ | 178.6 | | | $ | 421.3 | | | $ | 290.4 | |
| | | | | | | |
Gross profit as a % of sales | 45.1 | % | | 44.4 | % | | 44.4 | % | | 43.7 | % |
SG&A as a % of sales | 19.2 | % | | 16.2 | % | | 20.8 | % | | 18.8 | % |
R&D as a % of sales | 4.1 | % | | 4.2 | % | | 4.4 | % | | 5.0 | % |
Operating profit as a % of sales | 21.8 | % | | 23.9 | % | | 19.1 | % | | 15.4 | % |
Components of Sales Growth | | | | | | | | | | | |
| % Change Three Months Ended October 1, 2021 vs. Comparable 2020 Period | | % Change Nine Months Ended October 1, 2021 vs. Comparable 2020 Period |
Total revenue growth (GAAP) | 2.9 | % | | 16.5 | % |
Existing businesses (Non-GAAP) | 0.8 | % | | 14.1 | % |
Acquisitions (Non-GAAP) | 1.4 | % | | 0.6 | % |
Currency exchange rates (Non-GAAP) | 0.7 | % | | 1.8 | % |
| | | |
| | | | | | | |
| % Change Three Months Ended April 2, 2021 vs. Comparable 2020 Period | | |
Total revenue growth (GAAP) | 16.1 | % | | |
Existing businesses (Non-GAAP) | 14.3 | % | | |
| | | |
Currency exchange rates (Non-GAAP) | 1.8 | % | | |
| | | |
Total sales within our mobility technologies platform increased low single digits during the three months ended October 1, 2021 as compared to the comparable period of 2020. The increase was primarily attributable to continued strong demand for retail and environmental solutions in North America and dispenser and environmental deliveries in India but was impacted by the lower rate of demand related to the enhanced credit card security requirements for outdoor payment systems based on the EMV global standards as well as the end of Mexico fiscal regulation upgrades. Further, our acquisition of DRB contributed to the increase in total sales while sales from existing businesses declined by low single digits.
Total sales and sales from existing businesses within our mobility technologies platform increased at a rate in the mid-teens and a low-double digit rate,low double digits, respectively, during the threenine months ended April 2,October 1, 2021 as compared to the comparable period of 2020. The year-over-year results duringincrease was driven primarily due to the three months ended April 2, 2021 were primarily driven by broad growth acrossdirect and indirect impacts of COVID-19 on the portfolio includingprior year comparable periods as well as strong demand for retail and environmental solutions, continued strong demand for and shipments of fuel management systems in North America related to the enhanced credit card security requirements for outdoor payment systems based on the EMV global standards, Mexico regulatory demand and dispenser and environmental deliveries in India.
Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased at a rate in the high-teenshigh single digits during the three months ended April 2,October 1, 2021 as compared to the comparable period in 2020. The results in the three months ended April 2, 2021of our diagnostics and repair technologies platform were driven principallyprimarily by continued strong demand across most product categories, most notably specialty and hardline tools.tools, tool storage and diagnostics.
Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased more than 20% during the nine months ended October 1, 2021 as compared to the comparable period in 2020. The year-over-year results during the nine months ended October 1, 2021 were driven principally by the direct and indirect impacts of COVID-19 on the prior year comparable periods as well as strong demand across most product categories, most notably specialty and hardline tools, tool storage and diagnostics.
The impact on the Company of price increases are reflected as a component of the change in sales from existing businesses, and year-over-year price increases contributed 1.0%3.1% and 2.1% to sales growth during the three and nine months ended April 2,October 1, 2021 versus the comparable periodperiods in 2020.
Cost of Sales
Cost of sales increased $49.5$6.7 million for the three months ended April 2,October 1, 2021, as compared to the comparable period in 2020, which was due primarily to the increased costs due to inflationary pressures as well as the impact of the DRB acquisition.
The year-over-year increase of $159.6 million in cost of sales for the nine months ended October 1, 2021 as compared to the comparable period in 2020, was due primarily to higher year-over-year sales volumes from existing businesses as well as increased costs of materials due to inflationary pressures.
Gross Profit
Gross profit increased during the three months ended October 1, 2021, as compared to the comparable period in 2020, which was primarily due to the impact of the Company’s price increases and was partially offset by the increased costs due to inflationary pressures.
The year-over-year increase in gross profit for the nine months ended October 1, 2021 as compared to the comparable period is primarily due to higher sales volumes, the impact of the Company’s price increases and a favorable sales mix which was partially offset by increased costs due to inflationary pressures.
The 70 basis point increase in gross profit margin during the three months ended April 2,October 1, 2021 as compared to the comparable period in 2020 is primarily due to a favorable sales mixprice increases which waswere partially offset by increased costs of materials due to inflationary pressures.
The 9070 basis point increase in gross profit margin during the threenine months ended April 2,October 1, 2021 as compared to the comparable period in 2020 is primarily due to price increases and a favorable sales mix.mix and was partially offset by increased costs due to inflationary pressures.
Operating Costs and Other Expenses
SG&A expenses increased as a percentage of sales by 300 basis points during the three months ended April 2,October 1, 2021, as compared to the comparable period in 2020, primarily due to the increase of corporate costs associated with operating as a separate public company.
On a year-over-year basis, SG&A expenses increased as a percentage of sales increased 40by 200 basis points during the threenine months ended April 2,October 1, 2021, as compared to the comparable period in 2020, primarily due to the increase of corporate costs associated with operating as a separate public company which was partially offset by the increase of sales as compared to the same period in 2020.company.
R&D expenses (consisting principally of internal and contract engineering personnel costs) were relatively flatdecreased $0.4 million during the three months ended April 2,October 1, 2021 as compared to the comparable period in 2020.
R&D expenses increased $3.6 million during the nine months ended October 1, 2021, as compared to the comparable period in 2020 due to broad cost reduction efforts in the prior year period.
On a year-over-year basis, R&D expenses as a percentage of sales decreasedwas relatively flat during the three months ended April 2,October 1, 2021. R&D expenses as a percentage of sales decreased during the nine months ended October 1, 2021 due to consistent levels ofan increase in total sales which was partially offset by the increase in R&D expenses while total sales increased.expenses.
Operating Profit
Operating profit margin increased 1520decreased 210 basis points during the three months ended April 2,October 1, 2021 as compared to the comparable period in 2020.
Year-over-year operating profit margin comparisons were favorably impacted by:
•HigherThe year-over-year impacts of sales volumes, price, increases and a favorable sales mix, other operating impacts and changes in foreign currency exchange rates — favorable 700 basis points
•The impact of the prior year goodwill impairment of our Telematics business — favorable 1200300 basis points
Year-over-year operating profit margin comparisons were primarily impacted by the following unfavorable factors:
•Corporate costs associated with operating as a separate public company and other operating costs — unfavorable 330310 basis points
•Increased costs of materials due to inflationary pressures — unfavorable 50200 basis points
Operating profit margin increased 370 basis points during the nine months ended October 1, 2021 as compared to the comparable period in 2020.
Year-over-year operating profit margin comparisons were favorably impacted by:
•The year-over-year impacts of sales volumes, price, sales mix, other operating impacts and changes in foreign currency exchange rates — favorable 640 basis points
•The impact of the prior year goodwill impairment of our Telematics business — favorable 390 basis points
Year-over-year operating profit margin comparisons were primarily impacted by the following unfavorable factors:
•Corporate costs associated with operating as a separate public company and other costs — unfavorable 490 basis points
•Increased costs due to inflationary pressures — unfavorable 170 basis points
NON-GAAP FINANCIAL MEASURES
Sales from Existing Businesses
We define sales from existing businesses as total sales excluding (i) sales from acquired and 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 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.
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.
Prior to the Separation, our operating results were included in Fortive’s various consolidated U.S. federal and certain state income tax returns, as well as certain non-U.S. returns. For periods prior to the Separation, our combined financial statements
reflect income tax expense and deferred tax balances as if we had filed tax returns on a standalone basis separate from Fortive. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the periods prior to the Separation. For periods prior to the Separation, our pretax operating results include any transactions with Fortive as if it were an unrelated party.
In connection with the Separation, we entered into agreements with Fortive, including a Tax Matters Agreement. The Tax Matters Agreement distinguishes between the treatment of tax matters for “joint” filings compared to “separate” filings prior to the Separation. “Joint” filings are returns, such as the United States federal return, that include operations from both Fortive legal entities and the Company. By contrast, “separate” filings are tax returns (primarily U.S. state returns and non-U.S. returns), that exclusively include either Fortive’s or the Company’s operations, respectively. In accordance with the Tax Matters Agreement, the Company is liable for and has indemnified Fortive against all income tax liabilities involving “separate” filings for periods prior to the Separation.
On March 27, 2020, the U.S. Government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as an emergency economic stimulus package in response to the COVID-19 outbreak. The CARES Act contains, among other things, numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ended before the date of enactment. The CARES Act did not have a significant impact on our income tax provision.
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. In accordance with the Tax Matters Agreement with Fortive, the Company is liable for taxes arising from examinations of the following: (i) the Company’s initial U.S. federal taxable year October 9, 2020 through December 31, 2020; (ii) separate company state tax returns for all periods; (iii) joint state tax returns for the period October 9, 2020 through December 31, 2020; (iv) international separate company returns for all periods; and (v) joint international tax returns that include only Vontier legal entities for all periods. 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 is for the short taxable year October 9, 2020 through December 31, 2020. We expect to filefiled our initial U.S. federal income tax return for the 2020 short tax year with the Internal Revenue Service (“IRS”) duringin Q4 2021. Therefore, the IRS has not yet begun 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 2020. Our operations in certain foreign jurisdictions remain subject to routine examination for the tax years 2007 to 2020.
Comparison of the Three and Nine Months Ended April 2,October 1, 2021 and March 27,September 25, 2020
Our effective tax rate for the three and nine months ended April 2,October 1, 2021 was 23.6%19.6% and 22.2%, respectively, as compared to 119.7%20.9% and 29.0% for the three and nine months ended March 27, 2020.September 25, 2020, respectively. The year-over-year decrease in the effective tax rate for the three months ended April 2,October 1, 2021 as compared to the comparable period in the prior year was primarily due to an increase in non-taxable income. The year-over-year decrease in the effective tax rate for the nine months ended October 1, 2021 as compared to the comparable period in the prior year was primarily due to a non-deductible book goodwill impairment recognized in the threenine months ended March 27,September 25, 2020.
Our effective tax rate for both periods in 2021 and 2020 differs from the U.S. federal statutory rate of 21% due primarily to the effect of state taxes and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, inSpecific to the nine months ended September 25, 2020, there was an unfavorable impact related to a non-deductible book goodwill impairment.
COMPREHENSIVE INCOME
Comprehensive income increaseddecreased by $124.1$34.9 million during the three months ended April 2,October 1, 2021 as compared to the comparable period in 2020 due to unfavorable changes in foreign currency adjustments of $21.3 million and net earnings that were lower by $13.7 million.
Comprehensive income increased by $82.4 million during the nine months ended October 1, 2021 as compared to the comparable period in 2020 due primarily to net earnings that were higher by $95.2$95.4 million and favorablewhich was partially offset by unfavorable changes in foreign currency translation adjustments of $30.5$11.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Separation, we were dependent upon Fortive for all our working capital and financing requirements under Fortive’s centralized approach to cash management and financing of operations of its subsidiaries. With the exception of cash, cash equivalents and borrowings clearly associated with Vontier and related to the Separation, including the financial transactions described below, financial transactions relating to our business operations prior to the Separation were accounted for through Former Parent’s investment. Accordingly, none of the Former Parent’s cash, cash equivalents or debt at the corporate level was assigned to us in the financial statements for periods prior to the Separation.
As a result of the Separation, we no longer participate in Fortive’s cash management and financing operations. 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.
2021 Financing and Capital Transactions
During the first quarter ofnine months ended October 1, 2021, we completed the following financing and capital transactions:
•On March 10, 2021, we completed the private placement of $1.6 billion of senior unsecured notes in multiple series (collectively, the “Notes”). The Notes are fully and unconditionally guaranteed (the “Guarantees”), on a joint and several basis, by Gilbarco Inc. and Matco Tools Corporation, two of our wholly-owned subsidiaries (the “Guarantors”). Interest on the Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2021. The Notes and the Guarantees are the Company’s and the Guarantors’ general senior unsecured obligations.
•With the proceeds received from the issuance of the Notes, we repaid $1.4 billion of our Term Loans with the remainder used for working capital and other general corporate purposes.
•On April 28, 2021, we refinanced our Three-Year Term Loans and Revolving Credit Facility which extended the maturities and lowered the interest rates, among certain other changes.
•On August 5, 2021, the Company entered into a two-year, $600.0 million senior unsecured delayed-draw term loan and drew down the full $600.0 million on September 13, 2021.
Our long-term debt requires, among others, that we maintain certain financial covenants, and we were in compliance with all of these covenants as of April 2,October 1, 2021.
Refer also to Note 4.5. Financing to the Consolidated and Combined Condensed Financial Statements for additional information.
Overview of Cash Flows and Liquidity
Following is an overview of our cash flows and liquidity:
| | | | | | | | | | | |
| Three Months Ended |
($ in millions) | April 2, 2021 | | March 27, 2020 |
Net cash provided by operating activities | $ | 163.3 | | | $ | 55.6 | |
| | | |
Payments for additions to property, plant and equipment | $ | (11.0) | | | $ | (7.5) | |
Proceeds from sale of property | — | | | 0.1 | |
Cash paid for equity investments | (4.6) | | | (9.5) | |
Net cash used in investing activities | $ | (15.6) | | | $ | (16.9) | |
| | | |
Proceeds from issuance of long-term debt | $ | 1,586.5 | | | $ | — | |
Repayment of long-term debt | (1,400.0) | | | — | |
Payment for debt issuance costs | (1.2) | | | — | |
Net repayments of related-party borrowings | — | | | (23.6) | |
Net (repayments of) proceeds from short-term borrowings | (4.0) | | | 0.1 | |
Net transfers to Former Parent | (31.5) | | | (9.5) | |
Proceeds from stock option exercises | 1.5 | | | — | |
Acquisition of noncontrolling interest | (1.9) | | | — | |
Other financing activities | (3.9) | | | (1.0) | |
Net cash provided by (used in) financing activities | $ | 145.5 | | | $ | (34.0) | |
| | | | | | | | | | | |
| Nine Months Ended |
($ in millions) | October 1, 2021 | | September 25, 2020 |
Net cash provided by operating activities | $ | 341.9 | | | $ | 480.6 | |
| | | |
Cash paid for acquisitions, net of cash received | $ | (955.5) | | | $ | — | |
Payments for additions to property, plant and equipment | (32.9) | | | (27.3) | |
Proceeds from sale of property | — | | | 0.5 | |
Cash paid for equity investments | (7.6) | | | (9.5) | |
Cash received for settlement of investment | 7.0 | | | — | |
Net cash used in investing activities | $ | (989.0) | | | $ | (36.3) | |
| | | |
Proceeds from issuance of long-term debt | $ | 2,186.5 | | | $ | — | |
Repayment of long-term debt | (1,400.0) | | | — | |
Payment for debt issuance costs | (5.1) | | | — | |
Payment of common stock cash dividend | (8.4) | | | — | |
Net repayments of related-party borrowings | — | | | (23.4) | |
Net repayments of short-term borrowings | (6.2) | | | (3.5) | |
Net transfers to Former Parent | (35.6) | | | (419.9) | |
Proceeds from stock option exercises | 6.8 | | | — | |
Acquisition of noncontrolling interest | (1.9) | | | — | |
Other financing activities | (4.8) | | | (0.7) | |
Net cash provided by (used in) financing activities | $ | 731.3 | | | $ | (447.5) | |
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period as working capital needs and the timing of payments for income taxes, various employee liabilities, restructuring activities, and other items impact reported cash flows.
Cash flows from operating activities were $163.3$341.9 million during the threenine months ended April 2,October 1, 2021, an increasea decrease of $107.7$138.7 million, as compared to the comparable period in 2020. The year-over-year change in operating cash flows was primarily attributable to the following factors:
•Operating cash flows were impacted by higher net earnings during the threenine months ended April 2,October 1, 2021 as compared to the comparable period in 2020. Net earnings for the threenine months ended April 2,October 1, 2021 were impacted by a year-over-year increase in operating profits of $111.1$130.9 million. The year-over-year increase in operating profit was primarily due to an increase in gross profit of $48.7$151.3 million as well as a non-cash goodwill impairment charge of $85.3 million recognized during the threenine months ended March 27,September 25, 2020. These factors were partially offset by an increase in Selling, general and administrative expenses of $22.6$102.1 million. The goodwill impairment charge was a non-cash expense that decreased earnings without a corresponding impact to the comparable period operating cash flows.
•The aggregate of accounts receivable and long-term financing receivables provided $61.5used $25.0 million of operating cash flows during the threenine months ended April 2,October 1, 2021 compared to providing $30.5$53.2 million in the comparable period of 2020. 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 $18.6provided $11.0 million during the threenine months ended April 2,October 1, 2021 compared to using $71.9providing $70.2 million in the comparable period of 2020. This difference is due primarily to working capital needs and the timing of accruals and payments for compensation and benefits and tax-related amounts.
Investing Activities
Net cash used in investing activities decreasedincreased by $1.3$952.7 million during the threenine months ended April 2,October 1, 2021 as compared to the comparable period in 2020 primarily due to a decrease inthe cash paid for equity investments which was partially offset by an increase in payments for additions to property, plant and equipment.the acquisition of DRB.
Financing Activities and Indebtedness
Net cash provided by financing activities increased by $179.5 million$1.2 billion during the threenine months ended April 2,October 1, 2021 as compared to the comparable period in 2020 primarily due to the issuance of the $1.6 billion of Notes and the receipt of proceeds of our delayed-draw term loan of $600.0 million which was partially offset by the repayment of $1.4 billion of Term Loans. Additionally, in the comparable period in 2020 we made net payments to our former parent of $419.9 million.
Contractual Obligations
There have been no material changes to the contractual obligations as disclosed in our 2020 Annual Report on From 10-K except as noted below:
•Purchase obligations increased by approximately $95 million due to the timing of sourcing activities.
CRITICAL ACCOUNTING ESTIMATES
There were no material changes to the Company’s critical accounting estimates described in the Company’s 2020 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Instruments and Risk Management,” in the Company’s 2020 Annual Report on Form 10-K. There were no material changes to this information during the quarter ended April 2,October 1, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of the President and Chief Executive Officer, and the Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of
the period covered by this report. Based on such evaluation, the President and Chief Executive Officer, and the Senior Vice President and Chief Financial Officer, have concluded that, as of the end of such period, these disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Vontier is party in the ordinary course of business, and may in the future be involved in, legal proceedings, litigation, claims, and government investigations. Although the results of the legal proceedings, claims, and government investigations in which we are involved cannot be predicted with certainty, we do not believe that the final outcome of these matters is reasonably likely to have a material adverse effect on our business, financial condition, or operating results.
Refer to “Note 9.10. Litigation And Contingencies – Litigation”Litigation and Other Contingencies” of the Consolidated and Combined Condensed Financial Statements in this Form 10-Q for more information on certain legal proceedingsproceedings.
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Information Related to Forward-Looking Statements,” in Part I - Item 2 of this Form 10-Q and in “Risk Factors” in Part I - Item 1A of our 2020 Annual Report on Form 10-K. There were no material changes during the three months ended April 2,October 1, 2021 to the risk factors reported in our 2020 Annual Report on Form 10-K.
ITEM 6. EXHIBITS
| | | | | | | | | | | | | | | | | |
| | Incorporated by Reference (Unless Otherwise Indicated) |
| | | | | |
Exhibit Number | Exhibit Index | Form | File No. | Exhibit | Filing Date |
4.1 | | 8-K | 001-39483 | 4.1 | March 10, 2021 |
4.2 | | 8-K | 001-39483 | 4.2 | March 10, 2021 |
4.3 | | 8-K | 001-39483 | 4.3 | March 10, 2021 |
4.4 | | 8-K | 001-39483 | 4.4 | March 10, 2021 |
10.1 | | 8-K | 001-39483 | 10.1 | March 10, 2021 |
10.2 | | 8-K | 001-39483 | 10.1 | March 26, 2021 |
31.1 | | — | — | | Filed herewith |
31.2 | | — | — | | Filed herewith |
32.1 | | — | — | | Filed herewith |
32.2 | | — | — | | Filed herewith |
101.INS | Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document | — | — | | Filed herewith |
101.SCH | Inline XBRL Taxonomy Schema Document | — | — | | Filed herewith |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | — | — | | Filed herewith |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | — | — | | Filed herewith |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | — | — | | Filed herewith |
101.PRE | Inline Taxonomy Extension Presentation Linkbase Document | — | — | | Filed herewith |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | — | — | | Filed herewith |
*Indicates management contract or compensatory plan, contract or arrangement |
| | | | | | | | | | | | | | | | | |
| | Incorporated by Reference (Unless Otherwise Indicated) |
| | | | | |
Exhibit Number | Exhibit Index | Form | File No. | Exhibit | Filing Date |
10.1 | | 8-K | 001-39483 | 10.1 | August 5, 2021 |
31.1 | | — | — | | Filed herewith |
31.2 | | — | — | | Filed herewith |
32.1 | | — | — | | Filed herewith |
32.2 | | — | — | | Filed herewith |
101.INS | Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document | — | — | | Filed herewith |
101.SCH | Inline XBRL Taxonomy Schema Document | — | — | | Filed herewith |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | — | — | | Filed herewith |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | — | — | | Filed herewith |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | — | — | | Filed herewith |
101.PRE | Inline Taxonomy Extension Presentation Linkbase Document | — | — | | Filed herewith |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | — | — | | Filed herewith |
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| VONTIER CORPORATION: |
| | |
Date: May 7,November 5, 2021 | By: | /s/ David H. Naemura |
| | David H. Naemura |
| | Senior Vice President and Chief Financial Officer |
| | |
Date: May 7,November 5, 2021 | By: | /s/ Lynn Ross |
| | Lynn Ross |
| | Chief Accounting Officer |
| | |