S-1 1 d51765ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the U.S. Securities and Exchange Commission on December 28, 2020

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

VONTIER CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware
  3842      84-2783455
(State or Other Jurisdiction
Of Incorporation)
 

(Primary Standard Industrial   

Classification Code Number)   

  (I.R.S. Employer
Identification No.)

5420 Wade Park Boulevard

Suite 206

Raleigh, NC 27607

(Address of principal executive offices)

 

 

Courtney Kamlet

Vice President, Associate General Counsel and Corporate Secretary

Vontier Corporation

5420 Wade Park Boulevard, Suite 206

Raleigh, NC 27607

(984) 247-8308

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

W. Andrew Jack

Covington & Burling LLP

One CityCenter

850 Tenth Street, NW

Washington, DC 20001

(202) 662-6000

 

Thomas W. Greenberg

Skadden, Arps, Slate, Meagher & Flom LLP

One Manhattan West

New York, NY 10001

(212) 735-7886

 

Gregory P. Rodgers

Benjamin J. Cohen

Latham & Watkins LLP

885 Third Avenue

New York, NY 10022

(212) 906-1200

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☒

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Amount

to be

Registered

 

Proposed

Maximum

Offering Price

Per Security(1)

 

Proposed

Maximum

Aggregate
Offering Price(1)

  Amount of
Registration Fee(1)

Common stock, $0.0001 par value per share

  33,507,410   $33.60   $1,125,848,976   $122,830.12

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended. In accordance with Rule 457(c) under the Securities Act of 1933, as amended, the price shown is the average of the high and low sales prices of the common stock on December 21, 2020 as reported on the New York Stock Exchange (“NYSE”).

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.

 

 

 


Table of Contents

 

The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated December 28, 2020

Up to 33,507,410 Shares

Vontier Corporation

 

LOGO

Common Stock

 

 

This prospectus relates to the offer and sale of up to 33,507,410 shares of common stock, $0.0001 par value, of Vontier Corporation. All of these shares of our common stock are currently held by Fortive Corporation (“Fortive”). We are registering such shares under the terms of a registration rights agreement between us and Fortive.

In connection with any sales of shares of our common stock pursuant to the registration statement of which this prospectus forms a part, Fortive expects to exchange up to 33,507,410 shares of our common stock for certain indebtedness of Fortive held by Goldman Sachs & Co. LLC, which we refer to, in such role, as the “debt-for-equity exchange party.” The debt-for-equity exchange party will then sell the shares of our common stock to the underwriters, broker-dealers or agents and such party will sell the shares of our common stock pursuant to the registration statement of which this prospectus forms a part. The debt-for-equity exchange party, and not Fortive or us, will receive the proceeds from the sale of the shares in any such offering. However, as a result of exchanging the shares of our common stock with the selling stockholder prior to any offering, Fortive may be deemed to be a selling stockholder in such offering solely for U.S. federal securities law purposes.

The shares of our common stock registered hereby may be offered and sold by the selling stockholder through one or more underwriters, broker-dealers or agents. If the shares of our common stock are sold through underwriters or broker-dealers, the selling stockholder will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of our common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. See “Plan of Distribution.”

We are not selling any shares of common stock under this prospectus, and we will not receive any of the proceeds from the sale of shares of our common stock by the selling stockholder.

Our common stock is listed on the New York Stock Exchange (the “NYSE”) under the symbol “VNT.” On December 24, 2020, the closing price of our common stock as reported on the NYSE was $33.97 per share.

 

 

In reviewing this prospectus, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 18.

 

 

At the time the selling stockholder offers shares registered by this prospectus, we will provide a prospectus supplement that will contain specific information about the terms of the offering and that may add to or update the information in this prospectus. You should read this prospectus and the applicable prospectus supplement carefully before you invest.

The selling stockholder may offer the shares in amounts, at prices and on terms determined by market conditions at the time of the offering. The selling stockholder may sell shares through agents it selects or through underwriters and dealers it selects. The selling stockholder also may sell shares directly to investors. If the selling stockholder uses agents, underwriters or dealers to sell the shares, we will name them and describe their compensation in a prospectus supplement. See “Plan of Distribution.”

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

The date of this prospectus is                     .


Table of Contents

TABLE OF CONTENTS

 

     Page  

PRESENTATION OF INFORMATION

     ii  

MARKET, INDUSTRY AND OTHER DATA

     iii  

TRADEMARKS AND TRADE NAMES

     iii  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     12  

SUMMARY HISTORICAL AND PRO FORMA COMBINED CONDENSED FINANCIAL DATA

     13  

RISK FACTORS

     18  

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     42  

USE OF PROCEEDS

     43  

MARKET PRICE OF SHARES

     44  

DIVIDEND POLICY

     45  

CAPITALIZATION

     46  

SELECTED HISTORICAL COMBINED FINANCIAL DATA

     47  

UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

     49  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     55  

BUSINESS

     79  

MANAGEMENT AND DIRECTORS

     89  

EXECUTIVE AND DIRECTOR COMPENSATION

     97  

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     114  

PRINCIPAL AND SELLING STOCKHOLDERS

     124  

MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS

     125  

DESCRIPTION OF CERTAIN INDEBTEDNESS

     130  

DESCRIPTION OF CAPITAL STOCK

     132  

PLAN OF DISTRIBUTION

     137  

LEGAL MATTERS

     140  

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     140  

WHERE YOU CAN FIND MORE INFORMATION

     141  

INDEX TO FINANCIAL STATEMENTS

     F-1  

You should rely only on the information contained in this prospectus or to which we have referred you. Neither we nor the selling stockholder have authorized anyone to provide you with information different from, or inconsistent with, the information contained in this prospectus. Neither we nor the selling stockholder are making an offer to sell these securities in any jurisdiction where such offer or sale is not permitted. We and the selling stockholder take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

This prospectus is a part of a registration statement on Form S-1 that we filed with the U.S. Securities and Exchange Commission (the “SEC”) using a “shelf” registration or continuous offering process. Under this shelf process, the selling stockholder may from time to time sell shares of our common stock covered by this prospectus. Additionally, under the shelf process, in certain circumstances, we may provide a prospectus supplement that will contain certain specific information about the terms of a particular offering by the selling stockholder. We may also provide a prospectus supplement to add information to, or update or change information contained in this prospectus. You should read this prospectus and any applicable prospectus supplement and the information incorporated by reference before deciding to invest in shares of our common stock. You may obtain this information without charge by following the instructions under “Where You Can Find More Information” appearing elsewhere in this prospectus.

 

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Presentation of Information

This prospectus is part of a registration statement we filed with the SEC. Unless the context otherwise requires, (i) references in this prospectus to “Vontier,” the “Company,” “we,” “us” and “our” refer to Vontier Corporation, a Delaware corporation, and its consolidated subsidiaries, (ii) references in this prospectus to the “Industrial Technologies business,” “NEWCO” or the Company’s historical business and operations refer to the business and operations of Fortive’s Industrial Technologies segment that was transferred to the Company in connection with the separation and distribution described in the following paragraph and (iii) references in this prospectus to “Fortive” and “Parent” refer to Fortive Corporation, a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise requires.

On October 8, 2020, we entered into a series of agreements and transactions with Fortive pursuant to which Fortive transferred the assets and liabilities of its Industrial Technologies segment to us in exchange for shares of our common stock and a Cash Distribution, each as defined herein. As used herein, (i) the “separation” refers to the separation of the Industrial Technologies business from Fortive and the creation of a separate, publicly traded company holding the Industrial Technologies business and (ii) the “distribution” refers to the distribution on October 9, 2020 of 80.1% of the shares of Vontier common stock owned by Fortive to holders of Fortive common stock as of September 25, 2020, the record date for the distribution. Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus about Vontier assumes the completion of all of the transactions referred to in this prospectus in connection with the separation and distribution.

 

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Market, Industry and Other Data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from third-party sources and management estimates. Our management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause future performance to differ materially from our assumptions and estimates. See “Cautionary Statement Concerning Forward-Looking Statements.”

Trademarks and Trade Names

The name and mark, Vontier, and other trademarks, trade names and service marks of the Company appearing in this prospectus are our property or, as applicable, licensed to us, or, as applicable, are the property of Fortive. The name and mark, Fortive, and other trademarks, trade names and service marks of Fortive appearing in this prospectus are the property of Fortive. This prospectus also contains additional trade names, trademarks and service marks belonging to other companies. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.

 

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PROSPECTUS SUMMARY

This summary highlights information included elsewhere in this prospectus and does not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements,” “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Condensed Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and the notes thereto (the “Combined Financial Statements”).

Our Company

We are 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. We supply a wide range of solutions, spanning advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow 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, 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 administration operations are located in more than 30 countries across North America, Asia Pacific, Europe and Latin America.

We strive to create stockholder value through strong earnings growth, driven by continuous improvement in the operating performance of our existing business and acquisitions of other businesses that accelerate our strategy while expanding our portfolio into new and attractive markets.

To accomplish these goals, we use a set of growth, lean and leadership tools and processes, which is known as the Vontier Business System (“VBS”). Derived from the Fortive Business System (“FBS”), the VBS is designed to continuously improve business performance in the critical areas of quality, delivery, cost, growth and innovation. Our operating companies use the VBS to develop improvement initiatives in the areas of product development and commercialization of new products and solutions as well as improvements in sales and marketing, supply chain and manufacturing efficiency. All of our efforts are focused on accelerating our competitive advantages in the global mobility technologies and diagnostics and repair technologies markets that we serve.

Mobility Technologies. In the mobility technologies market, we are a leading global provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management (“telematics”), and traffic management, with products marketed under the Gilbarco, Veeder-Root, Orpak, Teletrac Navman and GTT brands.

Through our Gilbarco, Veeder-Root and Orpak businesses, we serve owners and operators of over 260,000 retail fuel stations and convenience stores globally. We market a suite of products, software and services to improve safety, environmental compliance and efficiency across our customers’ forecourts, stores and fuel supply chains. We have a large installed customer base with approximately 650,000 pay-at-pump devices and approximately 69,000 convenience stores utilizing our point-of-sale technology globally. We believe our substantial scale and sophisticated technology offerings strategically position us to capitalize on key market trends, including increasing vehicle ownership and infrastructure buildout, particularly in high-growth markets where we believe we have significant opportunities to expand our customer base.

Our telematics solutions are delivered as software-as-a-service (“SaaS”) to commercial and government fleet operators to provide visibility into vehicle location, fuel usage, speed, mileage and other insights into their



 

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mobile workforce in order to improve safety and productivity. We believe that our differentiated technology and software solutions are positioned to benefit from increasing regulations worldwide governing driver safety, hours of service and recording and monitoring requirements. As of December 31, 2019, our telematics business had deployed solutions in over 480,000 vehicles worldwide.

Our smart city solutions focus on improving safety, travel times, fuel costs and on-time performance of public transit and emergency vehicles. Our solutions connect and communicate with intersections, vehicles and emergency/transit operating systems to monitor, assess and take real-time action to change traffic flow so that emergency and transit vehicles get to their destinations as quickly and safely as possible. We believe our smart city solutions help make cities safer and more livable by improving response times of emergency service vehicles and the efficiency of public transport.

We serve our major markets with local manufacturing, sales and service capabilities that offer tailored solutions for local customers based on their unique needs. Combined with research and development for our mobility technologies products supporting our local presence in global markets, we deliver innovative solutions to customers around the world.

Diagnostic and Repair Technologies. We also deliver a broad set of vehicle repair tools and equipment for professional mechanics and technicians under the Matco, Ammco and Coats brands. Matco markets its products and services to automotive dealers, repair shops and fleet maintenance facilities through a network of over 1,800 franchised mobile distributors. Franchisees purchase vehicle repair tools, equipment and services from us and resell to end customers directly. In 2019, our Matco franchisees served over 140,000 automotive repair shops and over 600,000 technicians. To complement our offering of Matco vehicle repair tools, we have developed a SaaS suite of diagnostic tools and software to enhance repair shop workflow and strengthen relationships with our customers. We also generate sales from initial and recurring franchise fees as well as various financing programs that include installment sales and lease contracts to franchisees. We believe that Matco’s integrated workflow and diagnostic solutions are well positioned to capitalize on the increasing complexity of vehicles as advanced driver-assistance systems and other vehicle automation systems become prevalent.

Through its Ammco and Coats brands, our Hennessy business produces and markets a full line of wheel-service equipment including brake lathes, tire changers, wheel balancers and wheel weights. Hennessy delivers its solutions through a strong distributor network to reach its primary customer base of tire installation and repair shops.

High-Growth Markets. As a global company we see significant opportunity for greater sales penetration in historically underserved and developing high-growth markets, particularly for our mobility technologies. 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 Pacific (with the exception of Japan and Australia). In the year ended December 31, 2019, approximately $500 million of our total sales were from high-growth markets.



 

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Sales for the Year Ended December 31, 2019

By Solution

  

By Geography

LOGO    LOGO

 

Portfolio Overview

    

Mobility Technologies

  

Diagnostics and Repair

Technologies

Overview   

•  A leading provider of fuel dispensing, point-of-sale and payment systems, environmental compliance, vehicle tracking, fleet management and traffic management solutions and services

  

•  Develops and distributes vehicle repair tools and wheel-service equipment for professional mechanics and technicians

Key Brands   

LOGO

   LOGO
Markets Served   

•  Retail Fueling

 

•  Commercial Fueling

 

•  Fleet Management

 

•  Smart City Technology

  

•  Vehicle Service and Repair

 

•  Automotive Aftermarket

Market Dynamics*   

•  Size: ~$20.0 billion annually

 

•  Annual Growth Rate: Mid-single digits

  

•  Size: ~$7.0 billion annually

 

•  Annual Growth Rate: Low-single digits

Sector Growth Drivers   

•  Environment, safety, security and payment regulation

 

•  Larger, more sophisticated fueling networks

 

•  Changing regulatory and competitive landscape for fleet managers

  

•  Increasing complexity of vehicle repair

 

•  Aging vehicle installed base

 

•  Increasing vehicle mileage

 

•  Shortage of skilled technicians



 

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Portfolio Overview

    

Mobility Technologies

  

Diagnostics and Repair

Technologies

  

•  Driver shortages

 

•  Increasing urbanization and congestion

  
Customers   

•  Energy companies, fueling stations and convenience store retailers

 

•  Fleet operators

 

•  Municipalities

  

•  Automotive technicians

 

•  National automotive aftermarket retailers

 

•  Technical education students

 

•  Tire installation and repair shops

 

*

Estimated market size is based on 2019 industry sales and management estimates

Our History

Our Company was built through a number of acquisitions over the past four decades. The base mobility technologies portfolio originated with Fortive’s acquisition of Veeder-Root in the 1980s. The portfolio was developed through complementary acquisitions to establish a leading provider of solutions for the mobility infrastructure industry. Select acquisitions include Gilbarco in 2002, which established a leading presence in fuel dispensing solutions and convenience store technology and complemented Veeder-Root’s environmental sensor capabilities, and more recently, Orpak Systems in 2017, which added an installed base of approximately 49,000 service stations in, and technology for, high-growth markets to our Gilbarco Veeder-Root customer base. We established global capabilities in GPS tracking and fleet management through acquisitions of Navman Wireless in 2012 and Teletrac in 2013. Similarly, the acquisition of Global Traffic Technologies in 2016, established an entry point into smart city solutions for the mobility technologies market.

Our diagnostics and repair technologies portfolio was formed through the acquisitions of Hennessy Industries and Matco Tools in 1986, which established our leading positions in wheel-service equipment and mobile distribution of automatic tools and diagnostic equipment.

We have made numerous other bolt-on acquisitions and investments to support our growth and continue to enhance and evolve our portfolio, including Red Jacket in 2000, Gasboy in 2003, DOMS in 2005, L&T PDP Division (India) in 2010, Stratema Brazil in 2011, ANGI Energy Systems in 2014 and Midco in 2018 as well as minority investments in Tritium, a technology leader in high speed charging for electric vehicles (“EVs”), in 2018 and Driivz, a global leader in smart EV charging management solutions, in 2020.

Industry Overview

Mobility Infrastructure

The mobility infrastructure industry is broad and rapidly changing with the adoption of new technologies like autonomous driving, electric powertrains, mobile data connectivity and the development and evolution of smart cities, among other factors. We focus on niche, high-growth segments of the mobility infrastructure market with our unique portfolio of leading brands. Based on management’s estimates, the market size for mobility



 

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technologies is approximately $20.0 billion in annual sales and is expected to grow mid-single digits in 2020. Based on management’s estimates, the market size for diagnostics and repair technologies is approximately $7.0 billion in annual sales and is expected to grow low-single digits in 2020. Growth in our industry is driven by a broad array of factors, including global gross domestic product (“GDP”), the size of the global car parc, and environmental, safety, payment regulation and vehicle complexity, among other factors.

Key Trends and Industry Drivers

We believe we are well positioned to take advantage of various key market trends in our industry:

 

   

Increasing vehicle ownership and infrastructure development in high-growth markets create attractive long-term tailwinds for our business.

 

   

Global population growth and increased urbanization create infrastructure challenges that our product portfolio helps to address through telematics and our smart city solutions.

 

   

Rising vehicle complexity and a shortage of qualified technicians are increasing the need for innovative diagnostic, calibration and repair solutions for automotive workshops and repair centers.

 

   

Increasing regulation regarding enhanced payment security requirements.

 

   

Enhanced focus on clean, efficient energy solutions driven by regulation regarding carbon dioxide emissions, improved technology and increasingly affordable alternatives.

 

   

Increasing size and complexity of commercial supply chains and e-commerce deliveries spawning greater need for connected vehicle solutions and driver safety regulation is highlighting the need for recording, monitoring and the adoption of fleet management and telematics related solutions.

 

   

Growing penetration of electric vehicles is creating emerging opportunities across the mobility infrastructure industry.

Our Competitive Strengths

We believe we have significant competitive strengths driven by our culture and our leading global positions across key market segments. Some of our key competitive advantages are:

 

   

Strategically Positioned with Leading Brands in Attractive Markets. Many of our operating companies have been leaders in their respective markets for decades and we believe have built brand recognition and share positions that exceed many of their competitors. Gilbarco is a global brand recognized for its breadth of technology and ability to serve customers around the world. Veeder-Root is an established brand with over a one hundred fifty-year history that is well-known for deep environmental monitoring expertise and strength of technology. Our Matco brand is well recognized by customers for high quality and superior customer satisfaction delivered through a strongly committed franchise network. Hennessy, through its Coats branded tire changer, brake lathe and wheel balancing machines, is a leading wheel-service manufacturer. Teletrac and Navman are leading fleet management brands in several U.S. and international markets.

 

   

Global Presence and Reach. We operate globally, with diverse sales channels, manufacturing operations and product development that enable us to competitively address local requirements. We have experienced management teams located in key markets around the world, providing a strong local presence in high-growth markets.

 

   

Investment in EV Technology. We believe we are well positioned to leverage the growing electric vehicle, or EV, market with our minority investments in Tritium and Driivz. Tritium is a technology



 

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leader in high-speed charging for EVs and has a global footprint, with installations in 30 countries, and is a leader in the European market with approximately 2,700 high-speed chargers deployed globally. Tritium’s leading technology combined with our global footprint allows for us to leverage our global sales and service network to accelerate penetration of this fast growing market as EVs become a growing part of the global car parc. Driivz is an intelligent cloud-based software platform supporting EV service providers with operations management, energy optimization, billing and roaming capabilities, as well as driver self-service apps. The Tel Aviv, Israel-based company offers solutions currently used by more than 500,000 drivers and supporting over 130 types of charging stations.

 

   

A Strong Position in Connected and Integrated Workflow Solutions. With Veeder-Root’s Insite360 SaaS offerings, we believe we have a long runway of opportunities for a data analytics business on the forecourt, in-store and in fuel supply chain. We have a range of premier applications and unique “single pane of glass” offerings to connect the applications. In our Matco business, our growing line of diagnostic solutions is enhancing shop workflow with point of use information and repair services and strengthening our relationships and branding in the workshop.

 

   

Attractive Margins and Strong Cash Flow Generation. Our business benefits from attractive margins and a track record of strong cash flow generation. We have a strong base of recurring sales, representing approximately mid-20% of our sales in the year ended December 31, 2019, to mitigate volatility and cyclicality across our business portfolio and over the past three years then ended, consistently realized income profit margins of over 14%. Our cash flow generation is enhanced by low capital requirements, with capital expenditures averaging approximately 2% of sales over each of those last three years. Our stable free cash flows will enable us to deploy capital to fund strategic initiatives, organic growth opportunities and acquisitions.

 

   

Vontier Business System. Our operating businesses within our business portfolio have leveraged the fundamental Fortive Business System tools and have driven results through FBS for decades. We believe that our ability to continually improve quality, delivery, cost, growth and innovation through our Vontier Business System will improve customer satisfaction and accelerate significant competitive advantage.

Our Business Strategy

Our strategy is to maximize stockholder value through several key initiatives:

 

   

Build Competitive Advantage Through Innovation That Our Customers Value. In the markets we serve, we strive to drive organic growth by prioritizing the voice of our customers in everything we do. Over time, our focus on customers’ needs has enabled us to innovate effectively in markets where competitive leadership can be attained and, over long periods, sustained. Innovation and product vitality are key factors in maintaining our market leadership positions. In many end markets, we are among the leaders in the evolution of solutions to more software-driven products and business models, where our long history of reliability and strong brands position our product and service offerings at the key points of customer workflows.

 

   

Leverage and Expand Our Global Business Presence. Approximately 35% of our sales were generated outside the U.S. in the year ended December 31, 2019, and we have significant operations around the world in key geographic markets. This reach has facilitated our entry into new markets, as we have been able to harness existing sales channels and capitalize on our familiarity with local customer needs and regulations and the experience of our locally-based management resources. We have increased revenues generated in high-growth markets from approximately 14% in 2016 to approximately 18% in 2019 and we expect to continue to prioritize development of localized solutions for high-growth



 

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markets around the world, with strong local manufacturing and product development capabilities. We also intend to continue to pursue acquisitions of, and investments in, businesses that complement our strategy in specific markets or regions.

 

   

Attract and Retain Talented Employees. We believe that our team of talented employees, united by a common culture in pursuit of continuous improvement, provides us a significant competitive advantage. We seek to continue to attract, develop and retain world-class leaders and employees globally and to drive their engagement with our customer-centric approach. We will continue to closely align individual incentives to our and our stockholders’ objectives.

 

   

Drive Continuous Improvement Through Application of Our Vontier Business System. All of our operations and employees use our Vontier Business System to drive continuous improvement, measured by metrics such as quality, delivery, cost, growth and innovation. Through consistent application of business system tools and principles, we have been able to drive strong customer satisfaction and profitability in product and service lines that have been in our business portfolio for years while also driving significant improvement in growth and operating margins in product and service lines that we acquire. Our business system extends well beyond lean concepts, to include methods for driving growth and innovation demanded in our markets.

 

   

Redeploy Our Free Cash Flow to Grow and Improve Our Business Portfolio. We intend to continue to re-invest the substantial free cash flow generated by our existing business portfolio to drive innovation for organic growth and to acquire businesses that fit strategically or extend our business portfolio into new and attractive markets. We believe that we have developed considerable skill in identifying, acquiring and integrating new businesses. Our track record of disciplined success in targeting and effectively integrating acquisitions is an important aspect of our growth strategy.

The Underwriting and Debt-for-Equity Exchange

In connection with any sales of shares of our common stock pursuant to the registration statement of which this prospectus forms a part, Fortive expects to exchange up to 33,507,410 shares of our common stock for certain indebtedness of Fortive held by Goldman Sachs & Co. LLC, which we refer to, in such role, as the “debt-for-equity exchange party.” The debt-for-equity exchange party will then sell the shares of our common stock to the underwriters, broker-dealers or agents for cash and such parties will sell the shares of our common stock pursuant to the registration statement of which this prospectus forms a part. The debt-for-equity exchange party, and not Fortive or us, will receive the proceeds from the sale of the shares in any such offering. However, as a result of exchanging the shares of our common stock with the selling stockholder prior to any offering, Fortive may be deemed to be a selling stockholder in such offering solely for U.S. federal securities law purposes. The debt-for-equity exchange will occur on the settlement date of any such offering immediately prior to the settlement of the debt-for-equity exchange party’s sale of the shares to the underwriters, broker-dealers or agents (or affiliates thereof).

We expect that the indebtedness of Fortive exchanged by the debt-for-equity exchange party will consist of certain term loans of Fortive.

The amount of indebtedness of Fortive held by the debt-for-equity exchange party is expected to be sufficient to acquire all of the shares of our common stock to be sold by the debt-for-equity exchange party in any offering. Upon completion of the debt-for-equity exchange, the Fortive indebtedness exchanged in such debt-for-equity exchange will be retired. We do not guarantee or have any other obligations in respect of the Fortive indebtedness.



 

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The Separation and Distribution

The Separation and Distribution

On September 4, 2019, Fortive announced its intention to separate its Industrial Technologies business from the remainder of its businesses.

On October 9, 2020, 80.1% of our issued and outstanding shares of common stock were distributed to Fortive shareholders on the basis of two shares of our common stock for every five shares of Fortive common stock held as of the close of business on September 25, 2020, the record date for the distribution. Fortive received a private letter ruling from the Internal Revenue Service, or the IRS, to the effect that, among other things, the separation and the distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code, or the Code. We completed our separation from Fortive on October 9, 2020.

Vontier’s Post-Separation Relationship with Fortive

Prior to the completion of the distribution, we were a wholly-owned subsidiary of Fortive, and all of our outstanding shares of common stock were owned by Fortive. Following the separation and distribution, we and Fortive operate separately, each as a public company, while Fortive continues to hold 19.9% of our common stock.

On October 8, 2020, we entered into a separation and distribution agreement with Fortive, which is referred to in this prospectus as the “separation agreement.” We also entered into various other agreements on the same date to effect the separation and provide a framework for our relationship with Fortive after the separation, including a transition services agreement, an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, an FBS license agreement and a stockholder’s and registration rights agreement. These agreements provide for the allocation between us and Fortive of Fortive’s assets, employees, services, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the separation and govern certain relationships between us and Fortive after the separation. In exchange for the transfer of the assets and liabilities of Fortive’s Industrial Technologies business to us, we delivered to Fortive shares of our common stock and a cash distribution in the net amount of approximately $1.6 billion (the “Cash Distribution”). For additional information regarding the separation agreement and such other agreements, please refer to the sections entitled “Risk Factors—Risks Related to the Separation and Our Relationship with Fortive,” and “Certain Relationships and Related Person Transactions.”

Description of Certain Indebtedness

On September 29, 2020, we entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks, consisting of a three-year, $800 million senior unsecured delayed draw term loan facility (the “Three-Year Term Loans”), a two-year, $1 billion senior unsecured delayed draw term loan facility (the “Two-Year Term Loans” and together with the Three-Year Term Loans, the “Term Loans”) and a three-year, $750 million senior unsecured multi-currency revolving credit facility, including a $25 million sublimit for swingline loans and a $75 million sublimit for the issuance of letters of credit (the “Revolving Credit Facility” and, together with the Term Loans, the “Credit Facilities”). On October 9, 2020, we drew down the full $1.8 billion available under the Term Loans and used the proceeds from the Term Loans to make payments to Fortive, with $1.6 billion used to make the Cash Distribution for the contribution of certain assets and liabilities to Vontier in connection with the separation and $200 million used as a preliminary adjustment for excess cash balances remaining with us. The Revolving Credit Facility will be used to provide funds for our ongoing working capital requirements after the separation and for general corporate purposes. For more information, please refer to the sections entitled “Description of Certain Indebtedness,” “Risk Factors—Risks Related to Our Business,” and the “Unaudited Pro Forma Combined Condensed Financial Statements”.



 

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Corporate Information

We were incorporated in Delaware on August 5, 2019 for the purpose of holding Fortive’s Industrial Technologies business in connection with the separation and the distribution. Prior to the separation, we had no operations. The address of our principal executive offices is 5420 Wade Park Boulevard, Suite 206, Raleigh, NC 27607. Our telephone number is (984) 247-8308.

We maintain an Internet website at www.vontier.com. Our website, and the information contained therein, or connected thereto, is not incorporated by reference into this prospectus.



 

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Summary of Risk Factors

An investment in our company is subject to a number of risks, including risks relating to our business, the separation and our relationship with Fortive, our common stock, the successful implementation of our strategy, and the ability to grow our business. Set forth below is a high-level summary of some, but not all, of these risks. The following summary of risk factors is not exhaustive. Please read the information in the section entitled “Risk Factors” beginning on page 19 for a more thorough description of these and other risks.

Risks Related to Our Business

 

   

The effect of the COVID-19 pandemic on our global operations and the operations of our customers, suppliers, and vendors is having a significant impact on our business and results of operations.

 

   

Significant developments or uncertainties stemming from the U.S. administration, including changes in U.S. trade policies, tariffs and the reaction of other countries thereto, could have an adverse effect on our business.

 

   

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 prospectus, we have outstanding indebtedness of approximately $1.8 billion and the ability to incur an additional $750.0 million of indebtedness under the Revolving Credit Facility and in the future we may incur additional indebtedness. This indebtedness 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.



 

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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.

Risks Related to the Separation and Our Relationship with Fortive

 

   

We have a limited history of operating as a separate, publicly traded company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

 

   

As a separate, publicly traded company, we may not enjoy the same benefits that we did as a part of Fortive.

 

   

The unaudited pro forma combined condensed financial statements included in this prospectus are presented for informational purposes only and may not be an indication of our financial condition or results of operations in the future.

 

   

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.

 

   

Certain of our executive officers and directors may have actual or potential conflicts of interest because of their equity interest in Fortive. Also, one of our directors is a recently retired executive officer of Fortive, which may create conflicts of interest or the appearance of conflicts of interest.

 

   

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.



 

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THE OFFERING

 

Common Stock Offered by the Selling Stockholder

   Up to 33,507,410 shares of our common stock.

Selling Stockholder

   Goldman Sachs & Co. LLC, as the debt-for-equity exchange party.

Plan of Distribution

  

The selling stockholder may offer the shares in amounts, at prices and on terms determined by market conditions at the time of the offering. The selling stockholder may sell shares through agents it selects or through underwriters and dealers it selects. The selling stockholder also may sell shares directly to investors. If the selling stockholder uses agents, underwriters or dealers to sell the shares, we will name them and describe their compensation in a prospectus supplement.

Use of Proceeds

   We will not receive any proceeds from the sale of our common stock pursuant to this prospectus. All shares of our common stock sold pursuant to this prospectus will be offered and sold by the selling stockholder. We will not receive any proceeds from such sales.

Listing

   Our common stock is listed on the New York Stock Exchange (NYSE) under the symbol “VNT”

Risk Factors

   For a discussion of risks and uncertainties involved with an investment in our common stock, see “Risk Factors” on page 18 of this prospectus.

Unless we indicate otherwise, all information in this prospectus is based on 168,487,457 shares of our common stock outstanding as of December 22, 2020.



 

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SUMMARY HISTORICAL AND PRO FORMA COMBINED CONDENSED FINANCIAL DATA

The following summary financial data reflects the combined assets and results of operations of Fortive’s Industrial Technologies segment for the periods prior to the separation and distribution. We derived the summary historical and pro forma combined condensed statement of earnings data for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, and combined balance sheet data as of December 31, 2019 and December 31, 2018, as set forth below, from our audited annual combined financial statements, which are included elsewhere in this prospectus and from our unaudited combined pro forma financial statements included in the “Unaudited Pro Forma Combined Condensed Financial Statements” section of this prospectus. We derived the summary historical and pro forma combined statement of earnings data for the nine-month period ended September 25, 2020 and the combined balance sheet data as of September 25, 2020 from our unaudited combined condensed financial statements included elsewhere in this prospectus. We have prepared the unaudited combined condensed financial statements on the same basis as the audited combined financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. Our underlying financial records were derived from the financial records of Fortive for the periods reflected herein. Our historical results may not necessarily reflect our results of operations, financial position and cash flows for future periods or what they would have been had we been a separate, publicly traded company during the periods presented.

We have historically operated as part of Fortive and not as a separate, publicly traded company. Our combined financial statements have been derived from Fortive’s historical accounting records and are presented on a carve-out basis. All sales and costs as well as assets and liabilities directly associated with our business activity are included as a component of the combined financial statements. The combined financial statements also include allocations of certain general, administrative, sales and marketing expenses and cost of sales from Fortive’s corporate office and from other Fortive businesses to us and allocations of related assets, liabilities, and Fortive’s investment, as applicable. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the combined financial statements had we been an entity that operated separately from Fortive during the periods presented.

The summary unaudited pro forma combined condensed financial data presented has been prepared to reflect certain transactions, which are described in “Unaudited Pro Forma Combined Condensed Financial Statements” and are referred to herein as the “Transactions.” The summary unaudited pro forma combined condensed financial data has been derived from our unaudited pro forma combined condensed financial statements included elsewhere in this prospectus. The unaudited pro forma combined condensed statement of earnings data presented reflects the financial results as if the Transactions occurred on January 1, 2019, which was the first day of fiscal 2019. The unaudited pro forma combined condensed balance sheet data reflects the financial position as if the Transactions occurred on September 25, 2020, the date of such balance sheet data. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information.

The summary unaudited pro forma combined condensed financial statements are not necessarily indicative of our results of operations or financial condition had the Transactions been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition that would have resulted had we been operating as a separate, publicly traded company during such periods. In addition, they are not necessarily indicative of our future results of operations, financial position or cash flows.

This summary historical and pro forma combined condensed financial data should be reviewed in combination with “Unaudited Pro Forma Combined Condensed Financial Statements,” “Capitalization,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of



 

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Operations” and the combined financial statements and accompanying notes included in this prospectus ($ in millions, except net earnings as a percent of sales and per share data).

 

    Nine Months Ended     Year Ended December 31,  
    Pro Forma     Historical     Pro Forma     Historical  
($ in millions)   September 25,
2020
    September 25,
2020
    September 27,
2019
    2019     2019     2018     2017  
    (unaudited)     (unaudited)     (unaudited)     (unaudited)                    

Selected Statement of Earnings Data:

             

Total Sales

  $ 1,889.6     $ 1,889.6     $ 2,028.8     $ 2,772.1     $ 2,772.1     $ 2,665.9     $ 2,498.2  

Total cost of sales

    (1,064.2     (1,064.2     (1,163.6     (1,581.3     (1,581.3     (1,530.8     (1,425.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    825.4       825.4       865.2       1,190.8       1,190.8       1,135.1       1,072.8  

Gross profit margin

    43.7     43.7     42.6     43.0     43.0     42.6     42.9

Operating costs:

             

Selling, general and administrative expenses

    (356.0     (356.0     (362.9     (491.3     (491.3     (499.3     (445.8

Research and development expenses

    (93.7     (93.7     (102.0     (136.4     (136.4     (136.2     (126.2

Impairment of goodwill

    (85.3     (85.3     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    290.4       290.4       400.3       563.1       563.1       499.6       500.8  

Non-operating income (expense), net

    (29.4     (1.2     4.5       (40.4     2.7       7.7       23.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

    261.0       289.2       404.8       522.7       565.8       507.3       523.9  

Income taxes

    (77.8     (84.0     (94.5     (118.9     (129.3     (121.8     (150.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $ 183.2     $ 205.2     $ 310.3     $ 403.8     $ 436.5     $ 385.5     $ 373.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings as a percent of sales

    9.7     10.9     15.3     14.6     15.7     14.5     14.9

Net earnings per share:

             

Basic

  $ 1.09     $ 1.22     $ 1.84     $ 2.39        

Diluted

  $ 1.09     $ 1.22     $ 1.84     $ 2.39        

Weighted average shares outstanding:

             

Basic

    168.4       168.4       168.4       168.4        

Diluted

    168.4       168.4       168.4       168.4        

Summary Statement of Cash Flows Data:

             

Net cash (used in) provided by:

             

Operating activities

    $ 480.6     $ 322.3       $ 545.2     $ 421.0     $ 363.8  

Investing activities

      (36.3     (31.1       (40.3     (122.6     (258.3

Financing activities

      (447.5     (286.8       (499.8     (290.5     (114.8

Capital expenditures

      (27.3     (27.0       (38.0     (42.4     (68.4

Other Data (Non-GAAP)(a):

             

Adjusted EBITDA

  $ 435.6     $ 435.6     $ 461.4     $ 651.5     $ 651.5     $ 588.6     $ 568.7  

Free Cash Flow

    $ 453.3     $ 295.3       $ 507.2     $ 378.6     $ 295.4  

 

(a)

Refer to reconciliations included under the headings “Adjusted EBITDA” and “Free Cash Flow” below.



 

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     As of September 25, 2020      As of December 31,  
     Pro forma      Historical      Historical  
     2019      2018  
($ in millions)    (unaudited)      (unaudited)                

Balance Sheet Data:

           

Current assets

   $ 959.7      $ 756.3      $ 825.2      $ 861.6  

Current liabilities

     705.4        705.4        667.5        693.5  

Property and equipment, net

     94.7        94.7        101.9        180.6  

Total assets

     2,807.1        2,603.7        2,828.9        2,988.8  

Long-term debt

     1,792.2        —          24.6        222.5  

Total liabilities

     2,808.5        1,016.3        1,012.8        1,195.9  

Total equity

     (1.4      1,587.4        1,816.1        1,792.9  

Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures that we use to measure the performance of our business. The tables below reconcile these non-GAAP measures to the nearest financial measure that is in accordance with accounting principles generally accepted in the United States (“GAAP”) for the periods presented.

Adjusted EBITDA

 

   

We define Adjusted EBITDA as GAAP Net earnings adjusted to exclude net interest income, income taxes, depreciation and amortization, accruals for significant legal matters, restructuring costs and asset impairments, a gain on acquisition, and earnings attributable to noncontrolling interests.

 

   

The table below is a reconciliation of GAAP Net earnings to Adjusted EBITDA for the unaudited nine-month periods ended September 25, 2020 and September 27, 2019, the years ended December 31, 2019, 2018 and 2017, for the unaudited pro forma nine months ended September 25, 2020, and for the unaudited pro forma year ended December 31, 2019.

 

    Nine Months Ended     Year Ended December 31,  
   

Pro Forma

September 25,
2020

    Historical    

Pro Forma

2019

    Historical  
    September 25,
2020
    September 27,
2019
    2019     2018     2017  
($ in millions)   (unaudited)     (unaudited)     (unaudited)     (unaudited)                    

Reported Net Earnings (GAAP)

  $ 183.2     $ 205.2     $ 310.3     $ 403.8     $ 436.5     $ 385.5     $ 373.3  

Interest (income) expense, net

    29.0       0.8       (5.1     39.8       (3.3     (8.4     (8.4

Income taxes

    77.8       84.0       94.5       118.9       129.3       121.8       150.6  

Depreciation

    37.8       37.8       38.4       52.7       52.7       55.8       41.3  

Amortization

    21.8       21.8       24.1       31.8       31.8       30.6       24.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (Non-GAAP)

  $ 349.6     $ 349.6     $ 462.2     $ 647.0     $ 647.0     $ 585.3     $ 581.6  

Accruals for significant legal matters

    —         —         —         —         —         —         (2.6

Restructuring costs and asset impairments(a)

    85.4       85.4       0.3       6.2       6.2       2.5       5.8  

Loss (gain) from acquisition and divestiture(b)

    —         —         —         0.1       0.1       —         (15.3

Earnings attributable to noncontrolling interest

    0.6       0.6       (1.1     (1.8     (1.8     0.8       (0.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (Non-GAAP)

  $ 435.6     $ 435.6     $ 461.4     $ 651.5     $ 651.5     $ 588.6     $ 568.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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(a)

The nature of the restructuring and related activities initiated in 2019, 2018 and 2017 focused on improvements in operational efficiency through targeted workforce reductions and facility consolidations and closures. For additional information, see Note 13 to the accompanying audited combined financial statements.

The restructuring and other related charges incurred during 2019 were cash charges. The restructuring and other related charges incurred during 2018 include cash charges of $2.0 million and non-cash charges of $0.5 million. The restructuring and other related charges incurred during 2017 include cash charges of $3.6 million and $2.2 million of non-cash charges. For additional information, see Note 13 to the accompanying audited combined financial statements.

During the nine-month period ended September 25, 2020 a non-cash goodwill impairment charge of $85.3 million was recorded for our Telematics reporting unit and we incurred $0.1 million of other immaterial cash restructuring charges.

 

(b)

In 2017, we acquired the remaining noncontrolling interest associated with Orpak Systems Limited. We recorded a gain of $15.3 million on the acquisition. In 2019, we sold certain parts of our ACIS business and recognized a loss on the transactions of $0.1 million. For additional information, see Note 3 to the accompanying audited combined financial statements.

Free Cash Flow

 

   

We define Free Cash Flow as net cash provided by operating activities less payments for additions to property, plant and equipment (“capital expenditures”).

 

   

The table below is a reconciliation of GAAP Net cash provided by operating activities to Free Cash Flow for the nine-month periods ended September 25, 2020 and September 27, 2019 and years ended December 31, 2019, 2018 and 2017:

 

     Nine Months Ended     Year Ended December 31,  
     Historical     Historical  
($ in millions)    September 25,
2020
    September 27,
2019
    2019     2018     2017  
     (unaudited)     (unaudited)                    

Net cash provided by operating activities (GAAP)

   $ 480.6     $ 322.3     $ 545.2     $ 421.0     $ 363.8  

Less: payments for additions to property, plant & equipment (capital expenditures) (GAAP)

     (27.3     (27.0     (38.0     (42.4     (68.4

Free Cash Flow (Non-GAAP)

   $ 453.3     $ 295.3     $ 507.2     $ 378.6     $ 295.4  

Statement Regarding Non-GAAP Measures

Each of the non-GAAP measures set forth above should be considered in addition to, and not as a replacement for or superior to, the comparable GAAP measure, and may not be comparable to similarly titled measures reported by other companies. Management believes that these measures provide useful information to investors by offering additional ways of viewing our results that, when reconciled to the corresponding GAAP measure, help our investors to:

 

   

with respect to Adjusted EBITDA, understand the long-term profitability trends of our business and compare our profitability to prior and future periods and to our peers; and

 

   

with respect to Free Cash Flow (the “FCF Measure”), understand our ability to generate cash without external financings, strengthen our balance sheet, invest in our business and grow our business through acquisitions and other strategic opportunities (although a limitation of Free Cash Flow is that it does



 

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not take into account any debt service requirements or other non-discretionary expenditures, and as a result the entire Free Cash Flow amount is not necessarily available for discretionary expenditures).

Management also uses these non-GAAP measures to measure our operating and financial performance.

The items excluded from the non-GAAP measures set forth above have been excluded for the following reasons:

 

   

With respect to Adjusted EBITDA:

 

   

We exclude the amortization of acquisition-related intangible assets because the amount and timing of such charges are significantly impacted by the timing, size, number and nature of the acquisitions we consummate. While we have a history of significant acquisition activity we do not acquire businesses on a predictable cycle, and the amount of an acquisition’s purchase price allocated to intangible assets and related amortization term are unique to each acquisition and can vary significantly from acquisition to acquisition. Exclusion of this amortization expense facilitates more consistent comparisons of operating results over time between our newly acquired and long-held businesses, and with both acquisitive and non-acquisitive peer companies. We believe, however, it is important for investors to understand that such intangible assets contribute to revenue generation, and that intangible asset amortization related to past acquisitions will recur in future periods until such intangible assets have been fully amortized.

 

   

We exclude costs incurred pursuant to discrete restructuring plans that are fundamentally different (in terms of the size, strategic nature and planning requirements, as well as the inconsistent frequency, of such plans) from the ongoing productivity improvements that result from application of the Vontier Business System. Because these restructuring plans are incremental to the core activities that arise in the ordinary course of our business and we believe they are not indicative of our ongoing operating costs in a given period, we exclude these costs from the calculation of Adjusted EBITDA to facilitate a more consistent comparison of operating results over time.

 

   

With respect to the other items excluded from Adjusted EBITDA, we exclude these items because they are of a nature and/or size that occur with inconsistent frequency, occur for reasons that may be unrelated to our commercial performance during the period and/or we believe that such items may obscure underlying business trends and make comparisons of long-term performance difficult.

 

   

With respect to the FCF Measure, we exclude payments for additions to property, plant and equipment to demonstrate the amount of operating cash flow for the period that remains after accounting for our capital expenditure requirements.



 

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RISK FACTORS

You should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this prospectus. The risks and uncertainties described below are those that we have identified as material but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as market conditions, economic conditions, geopolitical events, changes in laws, regulations or accounting rules, fluctuations in interest rates, terrorism, wars or conflicts, major health concerns, natural disasters or other disruptions of expected business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.

Risks Related to Our Business

The effect of the COVID-19 pandemic on our global operations and the operations of our customers, suppliers, and vendors is having a significant impact on our business and results of operations.

Our global operations expose us broadly to the COVID-19 pandemic, which continues to spread worldwide. In particular, continued efforts to mitigate the spread of the virus have caused us, our suppliers, and customers to reduce commercial activities and utilization of facilities and manufacturing sites, resulting in reduction in demand for our products and services, our ability to source required materials and components, and our ability to manufacture, sell, and service our products. In addition, implementation of measures to help control the spread of the virus, including internal work-from-home policies to protect the health of our employees and community, “shelter in place” and “stay at home” orders, travel restrictions, school closures, social distancing measures and re-opening restrictions have negatively impacted our collaboration efforts with our global colleagues, customers, vendors, and service providers, and our ability to retain our workforce without implementing targeted furloughs, and have increased the risk and cost of protecting against cyber-attacks. Shelter-in-place orders from state and local governments and similar government orders and restrictions to control the spread of COVID-19 have significantly impacted our ability, and the ability of our franchisees, to make in-person sales and service visits to customers. In addition, such shelter-in-place orders and social distancing measures have significantly reduced overall driving and vehicle utilization in almost every jurisdiction, resulting in reduced demand for our products. Furthermore, the volatility and disruption in the capital markets from the COVID-19 pandemic and its impact on the global economy has adversely effected the cost of, and access to, capital. While we continue to implement global and local response teams, incremental cost reduction efforts, and business continuity efforts internally and with our customers, suppliers, and vendors, the duration and extent of the operational and financial impact of the COVID-19 pandemic remains highly uncertain.

The degree to which COVID-19 impacts us going forward will depend on future developments that are highly uncertain and therefore cannot be predicted, including, but not limited to, the duration and spread of the pandemic, its severity, or the actions taken to contain the spread and impact of COVID-19, and how quickly and to what extent normal economic, market, and operating conditions resume. Even after the COVID-19 pandemic has subsided as a public health matter, we may experience material adverse impacts to our business as a result of its adverse impact on the global economy and consumer confidence.

Significant developments or uncertainties stemming from the U.S. administration, including changes in U.S. trade policies, tariffs and the reaction of other countries thereto, could have an adverse effect on our business.

Changes, potential changes or uncertainties in U.S. social, political, regulatory and economic conditions, including as a result of laws and policies governing foreign trade, the health care system, manufacturing, and development and investment in the territories and countries where we or our customers operate, stemming from the U.S. administration, could adversely affect our business and financial statements. For example, the U.S. administration has increased tariffs on certain goods imported into the United States, raised the possibility of

 

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imposing significant, additional tariff increases and called for substantial changes to trade agreements. In particular, trade tensions between the United States and China have been escalating in recent months. China accounted for approximately 3% of our sales in the year ended December 31, 2019. These factors have adversely affected, and in the future could further adversely affect, our operating results and our business.

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.

We compete in markets in which we and our customers must comply with supranational, federal, state, local and other jurisdictional regulations, such as regulations governing health and safety, fuel economy standards, the environment and electronic communications, employment and franchising regulations and market standardizations, such as the Europay, MasterCard and Visa (“EMV”) global standard. We develop, configure and market our products, services and business model to meet customer needs created by these regulations and standards. These regulations and standards are complex, change frequently, have tended to become more stringent over time and may be inconsistent across jurisdictions. Any significant change or delay in implementation in any of these regulations or standards (or in the interpretation, application or enforcement thereof) could reduce or delay demand for our products and services, increase our costs of producing or delay the introduction of new or modified products and services, or could restrict our existing activities, products and services, or could otherwise adversely impact our business model. Furthermore, as our customer base as a whole progresses or completes the implementation of such regulations or standards the incremental demand generated by the initial adoption thereof will abate and our revenue will decline incrementally as demand drops, which may have an adverse impact on our financial results. In addition, in certain of our markets our growth depends in part upon the introduction of new regulations or implementation of industry standards on the timeline we expect. In these markets, the delay or failure of governmental and other entities to adopt or enforce new regulations or industry standards, or the adoption of new regulations or industry standards which our products and services are not positioned to address, could adversely affect demand. In addition, regulatory deadlines or industry standard implementation timelines may result in substantially different levels of demand for our products and services from period to period. For example, new regulations addressing emissions of greenhouse gasses due to impacts of climate change could result in product standard requirements and could adversely impact the cost, production, sales and financial performance of our operations.

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.

We generally sell our products and services in an industry that is characterized by rapid technological changes, frequent new product introductions and changing industry standards. If we do not develop innovative new and enhanced products and services on a timely basis, our offerings will become obsolete over time and our competitive position and financial statements will suffer. Our success will depend on several factors, including our ability to correctly identify customer needs and preferences, and predict future needs and preferences, including from new developments and innovation related to, among other things, electric vehicles and autonomous vehicles.

In particular, the transportation industry has experienced an incremental increase in the development, adoption and use of alternative power systems, including fuel cells, plug-in hybrids, and electric cars. Although the current adoption rate of alternative power systems in the transportation industry is not anticipated to materially reduce the internal combustion based global car parc in the near future, continued increase in the adoption of alternative power systems over an extended number of years may alter the nature of the global car parc in such a manner as to reduce the demand for petroleum fuel and, correspondingly, demand for our retail and commercial petroleum products, including our fuel dispenser systems, petroleum monitoring systems, and electronic payment technologies for retail petroleum stations. In addition, technological advances in alternative power systems may reduce the frequency of required maintenance for vehicles, resulting in lower demand for our vehicle repair tools.

 

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Furthermore, if we fail to accurately predict future customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products and services that do not lead to significant sales, which would adversely affect our profitability. Even if we successfully innovate and develop new and enhanced products and services, we may incur substantial costs in doing so, and our profitability may suffer.

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.

Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the acquired company before we acquired it. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We cannot assure you that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that adversely affect our financial statements.

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.

In addition to the environmental, health, safety, anticorruption, data privacy and other regulations noted elsewhere in this prospectus, our businesses are subject to extensive regulation by U.S. and non-U.S. governmental and self-regulatory entities at the supranational, federal, state, local and other jurisdictional levels, including the following:

 

   

we are required to comply with various import laws and export control and economic sanctions laws, which may affect our transactions with certain customers, business partners and other persons and dealings between our employees and between our subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies. In other circumstances, we may be required to obtain an export license before exporting the controlled item. Compliance with the various import laws that apply to our businesses can restrict our access to, and increase the cost of obtaining, certain products and at times can interrupt our supply of imported inventory;

 

   

we also have agreements to sell products and services to government entities and are subject to various statutes and regulations that apply to companies doing business with government entities. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing and other terms and conditions that are not applicable to private contracts. Our agreements with government entities may be subject to termination, reduction or modification at the convenience of the government or in the event of changes in government requirements, reductions in federal spending and other factors, and we may underestimate our costs of performing under the contract. In certain cases, a governmental entity may require us to pay back amounts it has paid to us. Government contracts that have been awarded to us following a bid process could become the subject of a bid protest by a losing bidder, which could result in loss of the contract. We are also subject to investigation and audit for compliance with the requirements governing government contracts;

 

   

we are also required to comply with increasingly complex and changing data privacy regulations in multiple jurisdictions that regulate the collection, use, protection and transfer of personal data, including the transfer of personal data between or among countries. Many of these foreign data privacy regulations (including the General Data Protection Regulation effective in the European Union in May 2018) are more stringent than those in the U.S. We may also face audits or investigations by one or more domestic or foreign government agencies relating to our compliance with these regulations. An adverse outcome under any such investigation or audit could subject us to fines or other penalties. That

 

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or other circumstances related to our collection, use and transfer of personal data could cause a loss of reputation in the market and/or adversely affect our business and financial position;

 

   

we are also required to comply with complex and evolving state, U.S. and foreign laws regarding the distribution of our products and services, including franchise laws and regulations. These rules are subject to change due to new or amended legislation or regulations, administrative or judicial interpretation or government enforcement policies. Any such change could adversely impact our current distribution and franchising business models and result in a decrease in sales or expose us to other significant costs affecting our business and financial position; and

 

   

we are also required to comply with ever changing labor and employment laws and regulations in multiple jurisdictions. For example, the California legislature’s passage of Assembly Bill 5, which codifies a new test for determining employee or independent contractor status in California, may impact the treatment of franchisees in our diagnostics and repair technologies business in California. In addition, it is possible that other jurisdictions may enact similar laws. As a result of the enactment of Assembly Bill 5, the lack of clear guidance from regulatory authorities and the courts on the application of Assembly Bill 5, and the possibility that other jurisdictions may enact similar laws, there is significant uncertainty regarding what the worker classification regulatory landscape will look like in future years. If regulatory authorities or courts determine that our franchisees are not independent contractors, we may be required to withhold and pay certain taxes in respect of such franchisees, may be liable for unpaid past taxes, unpaid wages and potential penalties, and may be subject to wage and hour laws and requirements (such as those pertaining to minimum wage and overtime), claims for employee benefits, social security contributions, and workers’ compensation and unemployment insurance, which could have an adverse effect on our business and financial position.

These are not the only regulations that our businesses must comply with. The regulations we are subject to have tended to become more stringent over time and may be inconsistent across jurisdictions. We, our representatives and the industries in which we operate may at times be under review and/or investigation by regulatory authorities. Compliance with these and other regulations may also affect our returns on investment, require us to incur significant expenses or modify our business model or impair our flexibility in modifying product, marketing, pricing or other strategies for growing our business. Our products and operations are also often subject to the rules of industrial standards bodies such as the International Standards Organization, and failure to comply with these rules could result in withdrawal of certifications needed to sell our products and services and otherwise adversely impact our business and financial statements. Failure to comply (or any alleged or perceived failure to comply) with the regulations referenced above or any other regulations could result in civil and criminal, monetary and non-monetary penalties, and any such failure or alleged failure (or becoming subject to a regulatory enforcement investigation) could also damage our reputation, disrupt our business, limit our ability to manufacture, import, export and sell products and services, result in loss of customers and disbarment from selling to certain federal agencies and cause us to incur significant legal and investigatory fees. For additional information regarding these risks, please refer to the section entitled “Business—Regulatory Matters.”

International economic, political, legal, compliance, epidemic and business factors could negatively affect our financial statements.

In 2019, approximately 35% of our sales were derived from customers outside the U.S. In addition, many of our manufacturing operations, suppliers and employees are located outside the U.S. Since our growth strategy depends in part on our ability to further penetrate markets outside the U.S. and increase the localization of our products and services, we expect to continue to increase our sales and presence outside the U.S., particularly in the high-growth markets. Our international business (and particularly our business in high-growth markets) is subject to risks that are customarily encountered in non-U.S. operations, including:

 

   

interruption in the transportation of materials to us and finished goods to our customers;

 

   

differences in terms of sale, including payment terms;

 

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local product preferences and product requirements;

 

   

changes in a country’s or region’s political or economic conditions, including changes in relationship with the U.S.;

 

   

trade protection measures, embargoes and import or export restrictions and requirements;

 

   

unexpected changes in laws or regulatory requirements, including changes in tax laws;

 

   

capital controls and limitations on ownership and on repatriation of earnings and cash;

 

   

epidemics, such as the coronavirus outbreak, that adversely impact travel, production or demand;

 

   

the potential for nationalization of enterprises;

 

   

limitations on legal rights and our ability to enforce such rights;

 

   

difficulty in staffing and managing widespread operations;

 

   

differing labor regulations;

 

   

difficulties in implementing restructuring actions on a timely or comprehensive basis;

 

   

differing protection of intellectual property; and

 

   

greater uncertainty, risk, expense and delay in commercializing products in certain foreign jurisdictions, including with respect to product and other regulatory approvals.

Any of these risks could negatively affect our financial statements, business, growth rate, competitive position, results of operations and financial condition.

We may be required to recognize impairment charges for our goodwill and other intangible assets.

As of September 25, 2020, the net carrying value of our goodwill and other intangible assets totaled approximately $1.3 billion. In accordance with generally accepted accounting principles, we periodically assess these assets to determine if they are impaired. For example, due in large part to the impacts of the COVID-19 pandemic, in early 2020 after reducing our forecasted sales and operating profit for our Telematics business, we performed a quantitative impairment assessment of that business. We determined that the change in forecast indicated the related carrying value of goodwill may not be recoverable, resulting in an impairment of $85.3 million. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of our assets, changes in the structure of our business, divestitures, market capitalization declines, or increases in associated discount rates may impair our goodwill and other intangible assets in the future. Any charges relating to such impairments would adversely affect our results of operations in the periods recognized.

We are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows.

Some of our existing or legacy businesses have in the past been, and in the future may be, the subject of suits brought by plaintiffs asserting that they have contracted or may contract either mesothelioma or another asbestos-related condition in connection with exposure to or use of products previously made or sold by such businesses. Many asbestos-related conditions, such as mesothelioma, have long latency periods in which the disease process develops, making it difficult to accurately predict the types and numbers of such claims in the future. While insurance coverage exists for many of these asbestos litigations, others may have no such coverage. If our insurance coverage is not applicable or is not adequate, we may be responsible for all defense expenditures, as well as any settlements or verdict payouts. Any future asbestos-related litigation, brought against us or our subsidiaries, whether with or without merit, could result in substantial liabilities and costs to us as well as divert the attention of our management, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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See Note 15 to our audited Combined Financial Statements included elsewhere in this prospectus for more information.

Our restructuring actions could have long-term adverse effects on our business.

In recent years, we have implemented multiple, significant restructuring activities across our businesses to adjust our cost structure, and we may engage in similar restructuring activities in the future. These restructuring activities and our regular ongoing cost reduction activities (including in connection with the integration of acquired businesses) reduce our available talent, assets and other resources and could slow improvements in our products and services, adversely affect our ability to respond to customers and limit our ability to increase production quickly if demand for our products increases. In addition, delays in implementing planned restructuring activities or other productivity improvements, unexpected costs or failure to meet targeted improvements may diminish the operational or financial benefits we realize from such actions. Any of the circumstances described above could adversely impact our business and financial statements.

Our defined benefit pension plans are subject to financial market risks that could adversely affect our financial statements.

The performance of the financial markets and interest rates impact our defined benefit pension plan expenses and funding obligations. Significant changes in market interest rates, decreases in the fair value of plan assets, investment losses on plan assets and changes in discount rates may increase our funding obligations and adversely impact our financial statements. In addition, upward pressure on the cost of providing health care coverage to current employees and retirees may increase our future funding obligations and adversely affect our financial statements.

As of the date of this prospectus, we have outstanding indebtedness of approximately $1.8 billion and the ability to incur an additional $750.0 million of indebtedness under the Revolving Credit Facility and in the future we may incur additional indebtedness. This indebtedness could adversely affect our businesses and our ability to meet our obligations and pay dividends.

As of the date of this prospectus, we have outstanding indebtedness of approximately $1.8 billion, and have the ability to incur an additional $750.0 million of indebtedness under the Revolving Credit Facility. See the section entitled “Description of Certain Indebtedness.” This debt could have important, adverse consequences to us and our investors, including:

 

   

requiring a substantial portion of our cash flow from operations to make interest payments;

 

   

making it more difficult to satisfy other obligations;

 

   

increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing;

 

   

increasing our vulnerability to general adverse economic and industry conditions;

 

   

reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our businesses;

 

   

limiting our ability to pay dividends;

 

   

limiting our flexibility in planning for, or reacting to, changes in our businesses and industries; and

 

   

limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase shares of our common stock.

The instruments governing the debt financing contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term interest. If we breach any of these restrictions and cannot obtain a waiver

 

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from the lenders on favorable terms, subject to applicable cure periods, the outstanding indebtedness (and any other indebtedness with cross-default provisions) could be declared immediately due and payable, which would adversely affect our liquidity and financial statements. In addition, any failure to obtain and maintain credit ratings from independent rating agencies would adversely affect our cost of funds and could adversely affect our liquidity and access to the capital markets. If we add new debt, the risks described above could increase. For additional information regarding the debt financing, please refer to the section entitled “Description of Certain Indebtedness.”

The risks described above will increase with the amount of indebtedness we incur, and in the future we may incur significant indebtedness in addition to the indebtedness described above. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to service our outstanding debt or to repay the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt.

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.

Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, or to dispose of material assets or operations, alter our dividend policy (if we pay dividends), seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The instruments that will govern our indebtedness may restrict our ability to dispose of assets and may restrict the use of proceeds from those dispositions. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.

In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness will depend on the generation of cash flow by our subsidiaries, including certain international subsidiaries, and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make adequate distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal, tax and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, may materially adversely affect our business, financial condition and results of operations and our ability to satisfy our obligations under our indebtedness or pay dividends on our common stock.

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 ability to grow sales, earnings and cash flow at or above our historical rates depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated

 

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synergies, and to make appropriate investments that support our long-term strategy. We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price. Promising acquisitions and investments are difficult to identify and complete for a number of reasons, including high valuations, competition among prospective buyers, the availability of affordable funding in the capital markets and the need to satisfy applicable closing conditions and obtain applicable antitrust and other regulatory approvals on acceptable terms. In addition, competition for acquisitions and investments may result in higher purchase prices. Changes in accounting or regulatory requirements or instability in the credit markets could also adversely impact our ability to consummate acquisitions and investments.

Our acquisition of businesses, investments, joint ventures and other strategic relationships could negatively impact our financial statements.

As part of our business strategy we acquire businesses, make investments and enter into joint ventures and other strategic relationships in the ordinary course, some of which may be material; please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details. These acquisitions, investments, joint ventures and strategic relationships involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our business and our financial statements:

 

   

any business, technology, service or product that we acquire or invest in could under-perform relative to our expectations and the price that we paid for it, or not perform in accordance with our anticipated timetable, or we could fail to operate any such business profitably;

 

   

we may incur or assume significant debt in connection with our acquisitions, investments, joint ventures or strategic relationships, which could also cause a deterioration of our credit ratings, result in increased borrowing costs and interest expense and diminish our future access to the capital markets;

 

   

acquisitions, investments, joint ventures or strategic relationships could cause our financial results to differ from our own or the investment community’s expectations in any given period, or over the long-term;

 

   

pre-closing and post-closing earnings charges could adversely impact operating results in any given period, and the impact may be substantially different from period to period;

 

   

acquisitions, investments, joint ventures or strategic relationships could create demands on our management, operational resources and financial and internal control systems that we are unable to effectively address;

 

   

we could experience difficulty in integrating personnel, operations and financial and other controls and systems and retaining key employees and customers;

 

   

we may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition, investment, joint venture or strategic relationship;

 

   

we may assume unknown liabilities, known contingent liabilities that become realized, known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the acquired company’s or investee’s activities. The realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position or cause us to fail to meet our public financial reporting obligations;

 

   

in connection with acquisitions and joint ventures, we may enter into post-closing financial arrangements such as purchase price adjustments, earn-out obligations and indemnification obligations, which may have unpredictable financial results;

 

   

in connection with acquisitions and investments, we have recorded significant goodwill and other intangible assets on our balance sheet. If we are not able to realize the value of these assets, we may be required to incur impairment charges; and

 

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we may have interests that diverge from those of our joint venture partners or other strategic partners and we may not be able to direct the management and operations of the joint venture or other strategic relationship in the manner we believe is most appropriate, exposing us to additional risk.

Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we or our predecessors have sold could adversely affect our financial statements.

We continually assess the strategic fit of our existing businesses and may divest, spin-off, split-off or otherwise dispose of businesses that are deemed not to fit with our strategic plan or are not achieving the desired return on investment. These transactions pose risks and challenges that could negatively impact our business and financial statements. For example, when we decide to sell or otherwise dispose of a business or assets, we may be unable to do so on satisfactory terms within our anticipated timeframe or at all, and even after reaching a definitive agreement to sell or dispose a business the sale is typically subject to satisfaction of pre-closing conditions which may not become satisfied. In addition, divestitures or other dispositions may dilute our earnings per share, have other adverse tax, financial and accounting impacts and distract management, and disputes may arise with buyers. In addition, we have retained responsibility for and/or have agreed to indemnify buyers against some known and unknown contingent liabilities related to certain businesses or assets we or our predecessors have sold or disposed. The resolution of these contingencies has not had a material effect on our financial statements but we cannot be certain that this favorable pattern will continue.

Conditions in the global economy, the particular markets we serve and the financial markets may adversely affect our business and financial statements.

Our business is sensitive to general economic conditions. Slower global economic growth, actual or anticipated default on sovereign debt, changes in global trade policies, volatility in the currency and credit markets, high levels of unemployment or underemployment, reduced levels of capital expenditures, changes in government fiscal and monetary policies, government deficit reduction and budget negotiation dynamics, sequestration, other austerity measures, political and social instability, natural disasters, terrorist attacks, and other challenges that affect the global economy adversely affect us and our distributors, customers and suppliers, including having the effect of:

 

   

reducing demand for our products, software and services, limiting the financing available to our customers and suppliers, increasing order cancellations and resulting in longer sales cycles and slower adoption of new technologies;

 

   

increasing the difficulty in collecting accounts receivable and the risk of excess and obsolete inventories;

 

   

increasing price competition in our served markets;

 

   

supply interruptions, which could disrupt our ability to produce our products;

 

   

increasing the risk of impairment of goodwill and other long-lived assets, and the risk that we may not be able to fully recover the value of other assets such as real estate and tax assets;

 

   

increasing the risk that counterparties to our contractual arrangements will become insolvent or otherwise unable to fulfill their contractual obligations which, in addition to increasing the risks identified above, could result in preference actions against us; and

 

   

increasing the risk of credit defaults under the extensions of credit that we provide in connection with our diagnostics and repair technologies operations.

In addition, adverse general economic conditions may lead to instability in U.S. and global capital and credit markets, including market disruptions, limited liquidity and interest rate volatility. If we are unable to access capital and credit markets on terms that are acceptable to us or our lenders are unable to provide financing in

 

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accordance with their contractual obligations, we may not be able to make certain investments or acquisitions or fully execute our business plans and strategies. Furthermore, our suppliers and customers are also dependent upon the capital and credit markets. Limitations on the ability of customers, suppliers or financial counterparties to access credit at interest rates and on terms that are acceptable to them could lead to insolvencies of key suppliers and customers, limit or prevent customers from obtaining credit to finance purchases of our products and services and cause delays in the delivery of key products from suppliers.

If growth in the global economy or in any of the markets we serve slows for a significant period, if there is significant deterioration in the global economy or such markets, if there is instability in global capital and credit markets, or if improvements in the global economy do not benefit the markets we serve, our business and financial statements could be adversely affected.

Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.

We are subject to income and transaction taxes in the U.S. and in numerous non-U.S. jurisdictions. On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA significantly revised the U.S. federal corporate income tax law by, among other things, lowering the corporate income tax rate to 21%, implementing a quasi-territorial tax system, and imposing a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition Tax”). The U.S. Treasury Department and IRS continue to issue regulations with respect to implementing the TCJA and further regulations are expected to be issued.

Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the TCJA), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, the complexity of our intercompany arrangements, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, our estimates of our effective tax rate and income tax assets and liabilities may be incorrect and our financial statements could be adversely affected; please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of additional factors that may adversely affect our effective tax rate and decrease our profitability in any period. The impact of the factors referenced in the first sentence of this paragraph may be substantially different from period-to-period.

In addition, the amount of income taxes we pay is and may be subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities. Due to the potential for changes to tax laws (or changes to the interpretation thereof) and the ambiguity of tax laws, the subjectivity of factual interpretations, the complexity of our intercompany arrangements and other factors, our estimates of income tax liabilities may differ from actual payments or assessments. If these audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. If we decide to repatriate earnings from foreign jurisdictions that have been considered permanently re-invested under foreign tax law standards, it could also increase our effective tax rate.

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.

Certain of our businesses sell a significant amount of their products to key distributors and other channel partners that have valuable relationships with customers and end-users. Some of these distributors and other partners also sell our competitors’ products or compete with us directly, and if they favor competing products for any reason they may fail to market our products effectively. Adverse changes in our relationships with these distributors and other partners, or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our financial statements. The levels of inventory maintained by our distributors and other channel partners, and changes in those levels, can also significantly impact our results of operations in any given

 

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period. In addition, the consolidation of distributors and customers in certain of our served industries could adversely impact our profitability.

Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations.

As further discussed in the section entitled “BusinessMaterials,” our manufacturing and other operations employ a wide variety of components, raw materials and other commodities. Prices for and availability of these components, raw materials and other commodities have fluctuated significantly in the past. Any sustained interruption in the supply of these items could adversely affect our business. In addition, due to the highly competitive nature of the industries that we serve, the cost-containment efforts of our customers and the terms of certain contracts we are party to, if commodity prices rise we may be unable to pass along cost increases through higher prices. If we are unable to fully recover higher commodity costs through price increases or offset these increases through cost reductions, or if there is a time delay between the increase in costs and our ability to recover or offset these costs, we could experience lower margins and profitability and our financial statements could be adversely affected.

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.

We purchase materials, components and equipment from third parties for use in our manufacturing operations. Our income could be adversely impacted if we are unable to adjust our purchases to reflect changes in customer demand and market fluctuations, including those caused by seasonality or cyclicality. During a market upturn, suppliers may extend lead times, limit supplies or increase prices. If we cannot purchase sufficient products at competitive prices and quality and on a timely enough basis to meet increasing demand, we may not be able to satisfy market demand, product shipments may be delayed, our costs may increase or we may breach our contractual commitments and incur liabilities. Conversely, in order to secure supplies for the production of products, we sometimes enter into noncancelable purchase commitments with vendors, which could impact our ability to adjust our inventory to reflect declining market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges and our profitability may suffer.

In addition, some of our businesses purchase certain requirements from sole or limited source suppliers for reasons of quality assurance, contractual commitment, cost effectiveness, availability or uniqueness of design. If these or other suppliers encounter financial, operating or other difficulties or if our relationship with them changes, we might not be able to quickly establish or qualify replacement sources of supply. The supply chains for our businesses could also be disrupted by supplier capacity constraints, bankruptcy or exiting of the business for other reasons, decreased availability of key raw materials or commodities and external events such as natural disasters, pandemic health issues, war, terrorist actions, governmental actions and legislative or regulatory changes. Any of these factors could result in production interruptions, delays, extended lead times and inefficiencies.

Because we cannot always immediately adapt our production capacity and related cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our production requirements. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our profitability.

 

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Risks Related to the Separation and Our Relationship with Fortive

We have a limited history of operating as a separate, publicly traded company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about us in this prospectus for periods prior to the separation refers to our businesses as operated by and integrated with Fortive. Our historical and pro forma financial information included in this prospectus for periods prior to the separation is derived from the consolidated financial statements and accounting records of Fortive. Accordingly, the historical and pro forma financial information included in this prospectus for periods prior to the separation does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented, or those that we will achieve in the future, primarily as a result of the factors described below:

 

   

our businesses have been operated by Fortive as part of its broader corporate organization, rather than as a separate, publicly traded company. Fortive or one of its affiliates performed various corporate functions for us such as legal, treasury, accounting, auditing, human resources, corporate affairs and finance. Our historical and pro forma financial results reflect allocations of corporate expenses from Fortive for such functions and are likely to be less than the expenses we would have incurred had we operated as a separate, publicly traded company;

 

   

historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we have entered into transition agreements with Fortive, these arrangements may not fully capture the benefits we have previously enjoyed as a result of being integrated with Fortive and may result in paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition;

 

   

generally, our working capital requirements and capital for general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of Fortive. We may now need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements; and

 

   

the cost of capital for our businesses may be higher as a separate, publicly traded company than Fortive’s cost of capital.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from Fortive. For additional information about the past financial performance of our businesses and the basis of presentation of the historical Combined Financial Statements and the unaudited pro forma combined condensed financial statements of our businesses, please refer to the sections entitled “Unaudited Pro Forma Combined Condensed Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Combined Financial Statements and accompanying notes included elsewhere in this prospectus.

As a separate, publicly traded company, we may not enjoy the same benefits that we did as a part of Fortive.

There is a risk that, as a separate publicly traded company, we may become more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of the current Fortive organizational structure. As part of Fortive, we were able to enjoy certain benefits from Fortive’s operating diversity, purchasing power and opportunities to pursue integrated strategies with Fortive’s other businesses. As a separate, publicly traded company, we do not have similar diversity or integration opportunities and may not have similar purchasing power or access to capital markets. Additionally, as part of Fortive, we were able to leverage the Fortive historical market reputation and performance and brand identity to recruit and retain key personnel to run our business. As a separate, publicly traded company, we will not have the same historical market reputation and performance or brand identity as Fortive and it may be more difficult for us to recruit or retain such key personnel.

 

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The unaudited pro forma combined condensed financial statements included in this prospectus are presented for informational purposes only and may not be an indication of our financial condition or results of operations in the future.

The unaudited pro forma combined condensed financial statements included in this prospectus are presented for informational purposes only and are not necessarily indicative of what our actual financial condition or results of operations would have been had the separation been completed on the date indicated. The assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect our financial condition or results of operations. Accordingly, our financial condition and results of operations in the future may not be evident from or consistent with such pro forma financial information.

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.

The separation agreement, among other things, provides for indemnification obligations (for uncapped amounts) designed to make us financially responsible for substantially all liabilities that may exist relating to our business activities, whether incurred prior to or after the separation. If we are required to indemnify Fortive under the circumstances set forth in the separation agreement, we may be subject to substantial liabilities. Please refer to the section entitled “Certain Relationships and Related Person Transactions—Agreements with Fortive—The Separation Agreement—Release of Claims and Indemnification.”

In connection with our separation from Fortive, Fortive agreed to indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Fortive’s ability to satisfy its indemnification obligation will not be impaired in the future.

Pursuant to the separation agreement and certain other agreements with Fortive, Fortive agreed to indemnify us for certain liabilities as discussed further in “Certain Relationships and Related Person Transactions.” However, third parties could also seek to hold us responsible for any of the liabilities that Fortive has agreed to retain, and there can be no assurance that the indemnity from Fortive will be sufficient to protect us against the full amount of such liabilities, or that Fortive will be able to fully satisfy its indemnification obligations. In addition, Fortive’s insurance will not necessarily be available to us for liabilities associated with occurrences of indemnified liabilities prior to the separation, and in any event Fortive’s insurers may deny coverage to us for liabilities associated with certain occurrences of indemnified liabilities prior to the separation. Moreover, even if we ultimately succeed in recovering from Fortive or such insurance providers any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could negatively affect our businesses, financial position, results of operations and cash flows.

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.

Fortive has received a private letter ruling from the IRS to the effect that, among other things, the separation and the distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. Fortive’s completion of the distribution was conditioned on, among other things, the receipt of an opinion of tax counsel, to the effect that, among other things, the distribution, together with certain related transactions, will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. The opinion of tax counsel and the private letter ruling relied on certain facts, assumptions, representations and undertakings from Fortive and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts,

 

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assumptions, representations or undertakings are incorrect or not otherwise satisfied, Fortive and its stockholders may not be able to rely on the private letter ruling or the opinion of tax counsel and could be subject to significant tax liabilities. Notwithstanding the private letter ruling or opinion of tax counsel, the IRS could determine on audit that the distribution or any of certain related transactions is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the private letter ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Fortive or us after the distribution. If the distribution or any of certain related transactions is determined to be taxable for U.S. federal income tax purposes, Fortive and/or its stockholders could incur significant U.S. federal income tax liabilities, and we could also incur significant liabilities.

In addition, under the tax matters agreement between Fortive and us, we are generally required to indemnify Fortive against taxes incurred by Fortive that arise as a result of a breach of a representation made by us, or as a result of us taking or failing to take, as the case may be, certain actions, including in each case those provided in connection with the private letter ruling from the IRS or opinion of tax counsel, that result in the distribution, together with certain related transactions, failing to meet the requirements of a tax-free distribution under Sections 355 and 368(a)(1)(D) of the Code. For a discussion of the tax matters agreement, please refer to the section entitled “Certain Relationships and Related Person Transactions—Agreements with Fortive—Tax Matters Agreement.”

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.

To preserve the tax-free treatment for U.S. federal income tax purposes to Fortive of the distribution and certain related transactions, under the tax matters agreement that we entered into with Fortive, we are restricted from taking any action that prevents the distribution, together with certain related transactions, from being tax-free for U.S. federal income tax purposes. Under the tax matters agreement, for the two-year period following the distribution, as described in the section entitled “Certain Relationships and Related Person Transactions—Agreements with Fortive—Tax Matters Agreement—Preservation of the Tax-Free Status of Certain Aspects of the Separation and Distribution,” we are subject to specific restrictions on our ability to enter into acquisition, merger, liquidation, sale and stock redemption transactions with respect to our stock. These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business. These restrictions will not limit the acquisition of other businesses by us for cash consideration. In addition, under the tax matters agreement, we may be required to indemnify Fortive against any tax liabilities as a result of the acquisition of our stock or assets, even if we do not participate in or otherwise facilitate the acquisition. Furthermore, we are subject to specific restrictions on discontinuing the active conduct of our trade or business, the issuance or sale of stock or other securities (including securities convertible into our stock but excluding certain compensatory arrangements), and sales of assets outside the ordinary course of business. Such restrictions may reduce our strategic and operating flexibility. For more information, please refer to the section entitled “Certain Relationships and Related Person Transactions—Agreements with Fortive—Tax Matters Agreement.”

Certain of our executive officers and directors may have actual or potential conflicts of interest because of their equity interest in Fortive. Also, one of our directors is a recently retired executive officer of Fortive, which may create conflicts of interest or the appearance of conflicts of interest.

Because of their current or former positions with Fortive, certain of our executive officers and directors own equity interests in Fortive. Continuing ownership of shares of Fortive common stock and equity awards could create, or appear to create, potential conflicts of interest if we and Fortive face decisions that could have implications for both Fortive and us. In addition, one of our directors, Martin Gafinowitz, is a recently retired former executive officer of Fortive. This relationship could create, or appear to create, potential conflicts of

 

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interest when we and Fortive encounter opportunities or face decisions that could have implications for both companies.

Fortive may compete with us.

Fortive will not be restricted from competing with us. If Fortive in the future decides to engage in the type of business we conduct, it may have a competitive advantage over us, which may cause our business, financial condition and results of operations to be materially adversely affected.

We may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect our businesses.

We may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, our businesses, operating results and financial condition could be adversely affected. We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:

 

   

Fortive’s Industrial Technologies business, which became our business, benefited from Fortive’s size and purchasing power in procuring certain goods, services and technologies. As a separate, independent entity, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable as those Fortive obtained prior to the separation. We may also incur costs for certain functions previously performed by Fortive, such as accounting, tax, legal, human resources and other general administrative functions, that are higher than the amounts reflected in our historical financial statements, which could cause our profitability to decrease;

 

   

the actions required to separate our and Fortive’s respective businesses could disrupt our and Fortive’s operations after the separation;

 

   

certain costs and liabilities that were otherwise less significant to Fortive as a whole are more significant for us as a stand-alone company;

 

   

we have incurred and may continue to incur costs in connection with the transition to being a stand-alone public company that may include accounting, tax (including certain transaction taxes, which are borne equally by us and Fortive), legal and other professional services costs, recruiting and relocation costs associated with hiring or reassigning our personnel, costs related to establishing a new brand identity in the marketplace and costs to separate information systems;

 

   

we may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: (i) we may be more susceptible to market fluctuations and other adverse events than if we were still a part of Fortive and (ii) our businesses are less diversified than Fortive’s businesses prior to the separation; and

 

   

to preserve the tax-free treatment for U.S. federal income tax purposes to Fortive of the distribution and certain related transactions, under the tax matters agreement that we entered into with Fortive, we are restricted from taking any action that adversely affects the distribution, together with certain related transactions, from being tax-free for U.S. federal income tax purposes. These restrictions may limit our ability to pursue certain strategic transactions or engage in other transactions that might increase the value of our businesses.

We or Fortive may fail to perform under various transaction agreements executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

The separation agreement and other agreements entered into in connection with the separation determine the allocation of assets and liabilities between the companies following the separation for those respective areas and

 

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include indemnifications related to liabilities and obligations. The transition services agreement provides for the performance of certain services by each company for the benefit of the other for a period of time after the separation. We rely on Fortive to satisfy its performance and payment obligations under these agreements. If Fortive is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once certain transaction agreements expire, we may not be able to operate our businesses effectively and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that Fortive currently provides to us. However, we may not be successful in implementing these systems and services or in transitioning data from Fortive’s systems to us.

In addition, we expect this process to be complex, time-consuming and costly. We are also establishing or expanding our own tax, treasury, internal audit, investor relations, corporate governance and listed company compliance and other corporate functions. We expect to incur one-time costs to replicate, or outsource from other providers, these corporate functions to replace the corporate services that Fortive historically provided us prior to the separation. Any failure or significant downtime in our own financial, administrative or other support systems or in the Fortive financial, administrative or other support systems during the transitional period during which Fortive provides us with support could negatively impact our results of operations or prevent us from paying our suppliers and employees, executing business combinations and foreign currency transactions or performing administrative or other services on a timely basis, which could negatively affect our results of operations.

In particular, our day-to-day business operations rely on information technology systems. A significant portion of the communications among our personnel, customers and suppliers take place on information technology platforms. We expect the transfer of information technology systems from Fortive to us to be complex, time consuming and costly. There is also a risk of data loss in the process of transferring information technology. As a result of our reliance on information technology systems, the cost of such information technology integration and transfer and any such loss of key data could have an adverse effect on our business, financial condition and results of operations.

Risks Related to Shares of Our Common Stock

The trading market for our common stock has existed for only a short period following the distribution, and the market price and trading volume of our common stock may fluctuate significantly.

Prior to the distribution, there was no public market for our common stock. An active trading market for our common stock commenced only recently following the distribution and may not be sustainable. The trading price of our common stock may be volatile and the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the per share trading price of our common stock declines significantly, you may be unable to resell your shares at or above the purchase price.

The market price of our common stock may fluctuate significantly. Among the factors that could affect our stock price are:

 

   

actual or anticipated fluctuations in our annual or quarterly earnings or operating results;

 

   

domestic and international economic factors unrelated to our performance;

 

   

lawsuits, enforcement actions and other claims by third parties or governmental authorities;

 

   

changes in our customers’ preferences;

 

   

new regulatory pronouncements and changes in regulatory guidelines;

 

   

industry or general market conditions;

 

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changes in securities analysts’ estimates of our financial performance or lack of research coverage and reports by industry analysts;

 

   

action by institutional stockholders or other large stockholders;

 

   

failure to meet any guidance given by us or any change in any guidance given by us, or changes by us in our guidance practices;

 

   

announcements by us of significant impairment charges;

 

   

speculation in the press or investment community;

 

   

investor perception of us and our industry;

 

   

changes in market valuations or earnings of similar companies;

 

   

announcements by us or our competitors of significant contracts, acquisitions, dispositions or strategic partnerships;

 

   

war, terrorist acts and epidemic disease, including related to COVID-19;

 

   

any future sales of our common stock or other securities; and

 

   

additions or departures of key personnel.

The stock markets have experienced volatility in recent years that has been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against the affected company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management’s attention and resources, which would harm our business, operating results and financial condition.

We cannot guarantee the payment of dividends on our common stock, or the timing or amount of any such dividends.

We have not yet determined whether or the extent to which we will pay any dividends on our common stock. The payment of any dividends in the future, and the timing and amount thereof, to our stockholders will fall within the discretion of our board of directors (the “Board”). The Board’s decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our then-existing debt agreements, industry practice, legal requirements and other factors that the Board deems relevant. For more information, please refer to the section entitled “Dividend Policy.” Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if we commence paying dividends.

Your percentage ownership in us may be diluted in the future.

In the future, your percentage ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and employees. In addition, our employees have rights to purchase or receive shares of our common stock as a result of the conversion of their Fortive stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) into our stock options and restricted stock units. The conversion of these Fortive awards into our awards is described in further detail in the section entitled “Executive and Director Compensation—Compensation Discussion and Analysis.” It is anticipated that our Compensation and Management Development Committee will grant additional equity awards to our employees and directors after the distribution, from time to time, under our employee benefits plans. These additional awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.

 

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In addition, our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as the Board generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the residual value of the common stock. Please refer to the section entitled “Description of Capital Stock.”

Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.

Our amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with the Board rather than to attempt an unsolicited takeover not approved by the Board. These provisions include, among others:

 

   

the inability of our stockholders to call a special meeting;

 

   

the inability of our stockholders to act by written consent;

 

   

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

 

   

the right of the Board to issue preferred stock without stockholder approval;

 

   

the division of the Board into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult;

 

   

provision that stockholders may only remove directors with cause;

 

   

the ability of our directors, and not stockholders, to fill vacancies (including those resulting from an enlargement of the Board) on the Board; and

 

   

the requirement that the affirmative vote of stockholders holding at least two-thirds of our voting stock is required to amend our amended and restated bylaws and certain provisions in our amended and restated certificate of incorporation.

In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the Board of Directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the Board of Directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder. Fortive and its affiliates have been approved as an interested stockholder of ours and therefore are not subject to Section 203.

 

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We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with the Board and by providing the Board with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that the Board determines is not in the best interests of us and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.

Our amended and restated certificate of incorporation designates the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders. Our amended and restated certificate of incorporation further designates the federal district courts of the United States of America as the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These forum selection provisions could discourage lawsuits against us and our directors, officers, employees and stockholders.

Our amended and restated certificate of incorporation provides that, unless we consent otherwise, the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of us, any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or stockholders to us or our stockholders, any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or bylaws, or any action asserting a claim governed by the internal affairs doctrine. This provision would not apply to claims brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction. We recognize that this forum selection clause may impose additional litigation costs on stockholders in pursuing any such claims, particularly if the stockholders do not reside in or near the State of Delaware. Our amended and restated certificate of incorporation further provides that, unless we consent otherwise, the federal district courts of the United States of America shall, to the fullest extent permitted by law, be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These forum selection provisions may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors, officers, employees and stockholders.

General Risk Factors

Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality.

Our growth depends in part on the growth of the markets which we serve, and visibility into our markets is limited (particularly for markets into which we sell through distribution). Our quarterly sales and profits depend substantially on the volume and timing of orders received during the fiscal quarter, which are difficult to forecast. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which could adversely affect our financial statements. Certain of our businesses operate in industries that may experience periodic, cyclical downturns. In addition, in certain of our businesses, demand depends on customers’ capital spending budgets, and product and economic cycles can affect the spending decisions of these entities. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, changes in incentive programs, new product introductions and customer inventory levels. Any of these factors could adversely affect our growth and results of operations in any given period.

 

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We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products and services.

Many of our businesses operate in industries that are intensely competitive and have been subject to consolidation. Because of the range of the products and services we sell and the variety of markets we serve, we encounter a wide variety of competitors. See “Business—Competition.” In order to compete effectively, we must retain longstanding relationships with major customers and continue to grow our business by establishing relationships with new customers, continually developing new or enhanced products and services to maintain and expand our brand recognition and leadership position in various product and service categories and penetrating new markets, including high-growth markets. Our failure to compete effectively and/or pricing pressures resulting from competition may adversely impact our financial statements, and our expansion into new markets may result in greater-than-expected risks, liabilities and expenses.

Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, agents or business partners.

We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, employment practices and workplace behavior, export and import compliance, economic and trade sanctions, money laundering and data privacy. In particular, the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced governmental corruption to some degree. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the United States and in other jurisdictions and related stockholder lawsuits, could lead to substantial civil and criminal, monetary and non-monetary penalties and could cause us to incur significant legal and investigatory fees. In addition, the government may seek to hold us liable for violations committed by companies we invest in or acquire. We rely on our suppliers to adhere to our supplier standards of conduct, material violations of such standards of conduct could occur that could have a material effect on our financial statements.

Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our business, reputation and financial statements.

Our operations, products and services are subject to environmental laws and regulations, which impose limitations on the discharge of pollutants into the environment and establish standards for the use, generation, treatment, storage and disposal of hazardous and non-hazardous wastes and impose end-of-life disposal and take-back programs. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations. In addition, some of our operations require the controlled use of hazardous or energetic materials in the development, manufacturing or servicing of our products. We cannot assure you that our environmental, health and safety compliance program (or the compliance programs of businesses we acquire) has been or will at all times be effective. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to our reputation. In addition, we cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws will not exceed our estimates or adversely affect our financial statements. Moreover, any accident that results in significant personal injury or property damage, whether occurring during development, manufacturing, servicing, use, or storage of our products, may result in significant production interruption, delays or claims for substantial damages caused by personal injuries or property damage, harm to our reputation, and reduction in morale among our employees, any of which may adversely and materially affect our results of operations.

 

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In addition, we may incur costs related to remedial efforts or alleged environmental damage associated with past or current waste disposal practices or other hazardous materials handling practices. We are also from time to time party to personal injury, property damage or other claims brought by private parties alleging injury or damage due to the presence of or exposure to hazardous substances. We may also become subject to additional remedial, compliance or personal injury costs due to future events such as changes in existing laws or regulations, changes in agency direction or enforcement policies, developments in remediation technologies, changes in the conduct of our operations and changes in accounting rules. For additional information regarding these risks, please refer to Note 15 to the audited Combined Financial Statements included in this prospectus. We cannot assure you that our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our reputation and financial statements or that we will not be subject to additional claims for personal injury or remediation in the future based on our past, present or future business activities.

Foreign currency exchange rates may adversely affect our financial statements.

Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect our financial statements. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of materials, products and services we purchase overseas. Sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, certain of our businesses may invoice customers in a currency other than the business’ functional currency, and movements in the invoiced currency relative to the functional currency could also result in unfavorable translation effects. We also face exchange rate risk from our investments in subsidiaries owned and operated in foreign countries.

We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our business and financial statements.

We are subject to a variety of litigation and other legal and regulatory proceedings incidental to our business (or the business operations of previously owned entities), including claims or counterclaims for damages arising out of the use of products or services and claims relating to intellectual property matters, employment matters, franchising and product distribution, tax matters, commercial disputes, breach of contract claims, competition and sales and trading practices, environmental matters, personal injury, insurance coverage and acquisition or divestiture-related matters, as well as regulatory investigations or enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, businesses divested by us or our predecessors. The types of claims made in these lawsuits may include claims for compensatory damages, punitive and consequential damages and/or injunctive relief. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and financial statements. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. In addition, developments in proceedings in any given period may require us to adjust the loss contingency estimates that we have recorded in our financial statements, record estimates for liabilities or assets that we were previously unable to estimate or pay cash settlements or judgments. Any of these developments could adversely affect our financial statements in any particular period. We cannot assure you that our liabilities in connection with litigation and other legal and regulatory proceedings will not exceed our estimates or adversely affect our financial statements and business.

 

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If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.

We own numerous patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to intellectual property owned by others, which in aggregate are important to our business. The intellectual property rights that we obtain, however, may not be sufficiently broad or otherwise may not provide us a significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed to us. In addition, the steps that we and our licensors have taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated, circumvented, designed-around or becoming subject to compulsory licensing, particularly in countries where intellectual property rights are not highly developed or protected. In some circumstances, enforcement may not be available to us because an infringer has a dominant intellectual property position or for other business reasons, or countries may require compulsory licensing of our intellectual property. We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. There can be no assurance that these agreements will adequately protect our trade secrets and other proprietary rights and will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets or other proprietary rights. Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our intellectual property or detect or prevent circumvention or unauthorized use of such property and the cost of enforcing our intellectual property rights could adversely impact our business, including our competitive position, and financial statements.

Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses or licensing expenses or be prevented from selling products or services.

From time to time, we receive notices from third parties alleging intellectual property infringement or misappropriation. Any dispute or litigation regarding intellectual property could be costly and time-consuming due to the complexity of many of our technologies and the uncertainty of intellectual property litigation. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or misappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights to critical technology, be unable to license critical technology or sell critical products and services, be required to pay substantial damages or license fees with respect to the infringed rights, be required to license technology or other intellectual property rights from others, be required to cease marketing, manufacturing or using certain products or be required to redesign, re-engineer or re-brand our products at substantial cost, any of which could adversely impact our competitive position and financial statements. Third-party intellectual property rights may also make it more difficult or expensive for us to meet market demand for particular product or design innovations. If we are required to seek licenses under patents or other intellectual property rights of others, we may not be able to acquire these licenses on acceptable terms, if at all. Even if we successfully defend against claims of infringement or misappropriation, we may incur significant costs and diversion of management attention and resources, which could adversely affect our business and financial statements.

Significant disruption in, or breach in security of, our information technology systems could adversely affect our business.

We rely on information technology systems, some of which are managed by third parties and some of which are managed on a decentralized, independent basis by our operating companies, to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers and other business partners), and to manage or support a variety of critical business processes and activities. These systems may be damaged, disrupted or shut down due to attacks by computer hackers, nation states, cyber-criminals, computer viruses, employee error or malfeasance,

 

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power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. In addition, security breaches of our systems (or the systems of our customers, suppliers or other business partners) could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers or suppliers. Like many multinational corporations, our information technology systems have been subject to computer viruses, malicious codes, unauthorized access and other cyber-attacks and we expect to be subject to similar incidents in the future as such attacks become more sophisticated and frequent. Any of the attacks, breaches or other disruptions or damage described above could interrupt our operations, delay production and shipments, result in theft of our and our customers’ intellectual property and trade secrets, damage customer and business partner relationships and our reputation or result in defective products or services, legal claims and proceedings, liability and penalties under privacy laws and increased costs for security and remediation, each of which could adversely affect our business and financial statements.

Defects, tampering, unanticipated use or inadequate disclosure with respect to our products or services (including software), or allegations thereof, could adversely affect our business, reputation and financial statements.

Manufacturing or design defects impacting safety, cybersecurity or quality issues (or the perception of such issues) for our products and services can lead to personal injury, death, property damage, data loss or other damages. These events could lead to recalls or safety or other public alerts, result in product or service downtime or the temporary or permanent removal of a product or service from the market and result in product liability or similar claims being brought against us. Recalls, downtime, removals and product liability and similar claims (regardless of their validity or ultimate outcome) can result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and services.

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.

As a public company following the separation from Fortive, we are required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we expect we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Our independent registered public accounting firm will also be required to express an opinion as to the effectiveness of our internal control over financial reporting. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.

The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

 

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If we suffer a loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed.

Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, public health crisis, war, terrorism or other natural or man-made disasters. If any of these facilities, supply chains or systems were to experience a catastrophic loss, it could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against such losses.

Our ability to attract, develop and retain talented executives and other key employees is critical to our success.

Our future performance is dependent upon our ability to attract, motivate and retain executives and other key employees. The loss of services of executives and other key employees or the failure to attract, motivate and develop talented new executives or other key employees could prevent us from successfully implementing and executing business strategies, and therefore adversely affect our financial statements. Our success also depends on our ability to attract, develop and retain a talented employee base. Certain employees could leave us given uncertainties relating to the separation, resulting in the inability to operate our business with employees possessing the appropriate expertise, which could have an adverse effect on our performance.

Work stoppages, union and works council campaigns and other labor disputes could adversely impact our productivity and results of operations.

Certain of our U.S. and non-U.S. employees are subject to collective labor arrangements. We are subject to potential work stoppages, union and works council campaigns and other labor disputes, any of which could adversely impact our financial statements and business, including our productivity and reputation.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements included in this prospectus are “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: future financial performance, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other financial measures; our management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions and the integration thereof, divestitures, spin-offs, split-offs or other distributions, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; the effects of the separation or the distribution on our business; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; future regulatory approvals and the timing thereof; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; future foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the anticipated timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,” “anticipate,” “will,” “should,” “could,” “intend,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including but not limited to the risks and uncertainties set forth under “Risk Factors.”

Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date of the prospectus, document, press release, webcast, call, materials or other communication in which they are made. Except to the extent required by applicable law, neither Fortive nor we assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.

 

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USE OF PROCEEDS

All shares of our common stock sold pursuant to this prospectus will be offered and sold by the debt-for-equity exchange party. We will not receive any proceeds from the sale of our common stock in any such offering. All of the proceeds from any offering will be received by the debt-for-equity exchange party, who will acquire our common stock being sold in such offering from Fortive in exchange for outstanding Fortive indebtedness held by the debt-for-equity exchange party.

 

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MARKET PRICE OF SHARES

Our shares of common stock have been listed and traded on the NYSE under the symbol “VNT” beginning on October 9, 2020, when they were listed immediately following the distribution. On December 24, 2020, the last sale price of our shares as reported on the NYSE was $33.97 per share. As of December 22, 2020, there were approximately 1,046 holders of record of our shares.

 

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DIVIDEND POLICY

We have not yet determined the extent to which we will pay any dividends on our common stock. The payment of any dividends in the future, and the timing and amount thereof, is within the discretion of the Board. The Board’s decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our then existing debt agreements, industry practice, legal requirements and other factors that our Board deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if we commence paying dividends.

 

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CAPITALIZATION

The following table sets forth our cash and equivalents and capitalization as of September 25, 2020:

 

   

on a historical basis; and

 

   

on a pro forma basis to give effect to the Transactions, as defined in the “Unaudited Pro Forma Combined Condensed Financial Statements.”

The information below is not necessarily indicative of what our cash and equivalents and capitalization would have been had the separation been completed as of September 25, 2020. In addition, it is not indicative of our future cash and equivalents and capitalization. This table should be read in conjunction with “Unaudited Pro Forma Combined Condensed Financial Statements,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and notes thereto included elsewhere in this prospectus (amounts in millions, except per share data).

 

     September 25, 2020  
     Historical      Pro Forma  
     (unaudited)  

Cash and equivalents

   $ —      $ 203.4  
  

 

 

    

 

 

 

Capitalization:

     

Debt:

     

Short-term borrowings

   $ 12.9      $ 12.9  

Long-term debt(1)

     —        1,792.2  
  

 

 

    

 

 

 

Total Debt

     12.9        1,805.1  

Equity:

     

Common Stock - $0.0001 par value, 1.985 billion shares authorized, 1,000 and 168.4 million shares issued and outstanding on a historical and pro forma basis, respectively

     —        —  

APIC

     —        (143.0

Net Parent investment

     1,445.8        —  

AOCI

     137.3        137.3  

Non-controlling interests

     4.3        4.3  
  

 

 

    

 

 

 

Total Equity

     1,587.4        (1.4
  

 

 

    

 

 

 

Total Capitalization

   $ 1,600.3      $ 1,803.7  
  

 

 

    

 

 

 

 

(1)

We currently have an additional $750.0 million of available capacity under our Revolving Credit Facility.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

Set forth below are selected historical combined financial data of Fortive’s Industrial Technologies segment for the periods indicated. We derived the combined statement of earnings data for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, and the combined balance sheet data as of December 31, 2019 and December 31, 2018, from our historical audited combined financial statements, which are included elsewhere in this prospectus. We derived the combined statement of earnings data for the nine-month periods ended September 25, 2020 and September 27, 2019, and the combined balance sheet data as of September 25, 2020, from our unaudited combined condensed financial statements included elsewhere in this prospectus. We have prepared the combined condensed balance sheet data as of September 27, 2019 from our accounting records. We have prepared the unaudited combined condensed financial statements on the same basis as the audited combined financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. We derived the audited combined balance sheet data as of December 31, 2017 and the audited combined statement of earnings data for the year ended December 31, 2016 from our historical audited combined financial statements, which are not included in this prospectus. We derived the unaudited combined statement of earnings data for the fiscal year ended December 31, 2015 and the unaudited combined balance sheet data as of December 31, 2016 and December 31, 2015 from the financial records of Fortive, which are not included in this prospectus. We have prepared the unaudited combined financial statements on the same basis as the audited combined financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. Our historical results may not necessarily reflect our results of operations, financial position and cash flows for future periods or what they would have been had we been a separate, publicly traded company during the periods presented.

We have historically operated as part of Fortive and not as a separate, publicly traded company. Our combined financial statements have been derived from Fortive’s historical accounting records and are presented on a carve-out basis. All sales and costs, as well as assets and liabilities directly associated with our business activity, are included as a component of the combined financial statements. The combined financial statements also include allocations to us of certain general, administrative, sales and marketing expenses and cost of sales from Fortive’s corporate office and from other Fortive businesses, and allocations of related assets, liabilities, and Fortive’s investment, as applicable. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the combined financial statements had we been an entity that operated separately from Fortive during the periods presented. Per share data has not been presented since our business was wholly-owned by Fortive during the periods presented.

 

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This selected historical combined financial data should be reviewed in combination with “Unaudited Pro Forma Combined Condensed Financial Statements,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and accompanying notes included in this prospectus.

 

    Nine Months Ended     Year Ended December 31,  
($ in millions)   September 25,
2020
    September 27,
2019
    2019     2018     2017     2016     2015  
    (unaudited)     (unaudited)                             (unaudited)  

Selected Statement of Earnings Information:

             

Sales

  $ 1,889.6     $ 2,028.8     $ 2,772.1     $ 2,665.9     $ 2,498.2     $ 2,388.1     $ 2,243.3  

Cost of sales

    (1,064.2     (1,163.6     (1,581.3     (1,530.8     (1,425.4     (1,368.8     (1,310.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    825.4       865.2       1,190.8       1,135.1       1,072.8       1,019.3       932.5  

Operating costs:

             

Selling, general and administrative expenses

    (356.0     (362.9     (491.3     (499.3     (445.8     (429.7     (438.0

Research and development expenses

    (93.7     (102.0     (136.4     (136.2     (126.2     (116.6     (107.8

Impairment of goodwill

    (85.3     —         —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    290.4       400.3       563.1       499.6       500.8       473.0       386.7  

Non-operating income (expense), net

    (1.2     4.5       2.7       7.7       23.1       3.3       (1.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

    289.2       404.8       565.8       507.3       523.9       476.3       385.2  

Income taxes

    (84.0     (94.5     (129.3     (121.8     (150.6     (171.6     (137.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

  $ 205.2     $ 310.3     $ 436.5     $ 385.5     $ 373.3     $ 304.7     $ 247.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings as a percent of sales

    10.9     15.3     15.7      14.5      14.9      12.8      11.0 

 

    As of     As of December 31,  
($ in millions)   September 25,
2020
    September 27,
2019
    2019     2018     2017     2016     2015  
    (unaudited)     (unaudited)                       (unaudited)     (unaudited)  

Selected Balance Sheet Data:

             

Total assets

  $ 2,603.7     $ 2,851.9     $ 2,828.9     $ 2,988.8     $ 2,867.3     $ 2,443.0     $ 2,222.7  

Total liabilities

    1,016.3       1,176.5       1,012.8       1,195.9       1,128.6       1,003.9       783.0  

Long-term debt

    —         223.7       24.6       222.5       195.5       190.2       54.0  

Total equity

  $ 1,587.4     $ 1,675.4     $ 1,816.1     $ 1,792.9     $ 1,738.7     $ 1,439.1     $ 1,439.7  
    Nine Months Ended     Year Ended December 31,  
($ in millions)   September 25,
2020
    September 27,
2019
    2019     2018     2017     2016     2015  
    (unaudited)     (unaudited)                             (unaudited)  

Cash flow provided by
(used in):

             

Operating Activities

  $ 480.6     $ 322.3     $ 545.2     $ 421.0     $ 363.8     $ 419.3     $ 319.1  

Investing Activities

    (36.3     (31.1     (40.3     (122.6     (258.3     (148.5     (89.2

Financing Activities

  $ (447.5   $ (286.8   $ (499.8   $ (290.5   $ (114.8   $ (278.5   $ (226.3

 

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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The following unaudited pro forma combined condensed financial statements consist of an Unaudited Pro Forma Combined Condensed Statement of Earnings for the nine-month period ended September 25, 2020 and the year ended December 31, 2019 and an Unaudited Pro Forma Combined Condensed Balance Sheet as of September 25, 2020. The Unaudited Pro Forma Combined Condensed Statement of Earnings and the Unaudited Pro Forma Combined Condensed Balance Sheet as of and for the nine-month period ended September 25, 2020 were derived from our historical unaudited combined condensed financial statements included elsewhere in this prospectus and the Unaudited Pro Forma Statement of Earnings for the year ended December 31, 2019 was derived from our historical audited financial statements included elsewhere in this prospectus. The pro forma adjustments give effect to the transactions described below. The Unaudited Pro Forma Combined Condensed Statement of Earnings for the nine-month period ended September 25, 2020 and the year ended December 31, 2019 gives effect to the transactions described below as if they had occurred on January 1, 2019, the first day of fiscal 2019. The Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to the transactions described below as if they had occurred on September 25, 2020, our latest balance sheet date. References to the “Company” in this section and in the following unaudited pro forma combined condensed financial statements and our combined financial statements included in this prospectus shall mean Fortive’s Industrial Technologies segment.

The unaudited pro forma combined condensed financial statements include certain adjustments that are necessary to present fairly our Unaudited Pro Forma Combined Condensed Statements of Earnings and Unaudited Pro Forma Combined Condensed Balance Sheet as of and for the periods indicated. The pro forma adjustments give effect to events that are (i) directly attributable to the transactions described below, (ii) factually supportable, and (iii) with respect to the Unaudited Pro Forma Combined Condensed Statements of Earnings, expected to have a continuing impact on us. The pro forma adjustments are based on assumptions that management believes are reasonable given the information currently available.

The unaudited pro forma combined condensed financial statements give effect to the following transactions, which we refer to as the “Transactions”:

 

   

the transfer to us from Fortive and Fortive affiliates pursuant to the separation agreement in consideration for (i) shares of our common stock, and (ii) a Cash Distribution of $1.6 billion funded from the incurrence of $1.8 billion of indebtedness under the Credit Facilities with remaining proceeds used to provide $200 million in available cash on our balance sheet upon completion of the distribution; and

 

   

the capital structure after giving effect to the distribution.

The unaudited pro forma combined condensed financial statements are subject to the assumptions and adjustments described in the accompanying notes.

In connection with the separation, we entered into a transition services agreement with Fortive, pursuant to which Fortive and we will provide to each other certain specified services on a temporary basis, including various information technology, financial 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.

No adjustments have been included in the Unaudited Pro Forma Combined Condensed Statements of Earnings for additional annual operating costs. Although expenses reported in our Combined Condensed Statements of Earnings include allocations of certain Fortive costs (including corporate costs, shared services and other selling, general and administrative costs that benefit us), as a public company we anticipate incurring additional recurring costs that could be materially different from the allocations of Fortive costs or costs incurred by us which are

 

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included within the historical combined financial statements. These additional recurring costs are primarily for the following:

 

   

additional personnel costs, including salaries, benefits and potential bonuses and/or share-based compensation awards for staff additions to replace support provided by Fortive that is not covered by the transition services agreement; and

 

   

corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees.

Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs. We expect these incremental costs to range between approximately $35 million and $45 million per year, compared to amounts incurred by us or allocated to us historically. We have not adjusted the accompanying unaudited pro forma combined condensed financial statements for any of these estimated costs as they are projected amounts based on estimates and, therefore, are not factually supportable.

The unaudited pro forma combined condensed financial statements have been presented for informational purposes only. The pro forma information is not necessarily indicative of our results of operations or financial condition had the separation and the related transactions been completed on the dates assumed and should not be relied upon as a representation of our future performance or financial position as a separate public company.

The following unaudited pro forma combined condensed financial statements should be read in conjunction with our historical combined financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this prospectus.

 

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VONTIER CORPORATION

UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET

($ and shares in millions, except per share amounts)

 

     As of September 25, 2020  
$ in millions    Historical      Pro Forma
Adjustments
    Notes      Pro Forma  

ASSETS

          

Current assets:

          

Cash and equivalents

   $ —      $ 203.4       (a)      $ 203.4  

Accounts receivable, net

     431.1        —            431.1  

Inventories

     217.6        —            217.6  

Prepaid expenses and other current assets

     107.6        —            107.6  
  

 

 

    

 

 

      

 

 

 

Total current assets

     756.3        203.4          959.7  

Property, plant and equipment, net

     94.7        —            94.7  

Operating lease right-of-use assets

     39.9        —            39.9  

Long-term financing receivables, net

     243.5        —            243.5  

Other assets

     159.7        —            159.7  

Goodwill

     1,058.7        —            1,058.7  

Other intangible assets, net

     250.9        —            250.9  
  

 

 

    

 

 

      

 

 

 

Total assets

   $ 2,603.7      $ 203.4        $ 2,807.1  
  

 

 

    

 

 

      

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Short-term borrowings

   $ 12.9      $ —          $ 12.9  

Trade accounts payable

     356.3        —            356.3  

Current operating lease liabilities

     11.1        —            11.1  

Accrued expenses and other current liabilities

     325.1        —            325.1  
  

 

 

    

 

 

      

 

 

 

Total current liabilities

     705.4        —            705.4  

Operating lease liabilities

     29.5        —            29.5  

Other long-term liabilities

     281.4        —            281.4  

Long-term debt

     —          1,792.2       (a),(b)        1,792.2  

Equity:

          

Common Stock—$0.0001 par value, 1.985 billion shares authorized, 168.4 million shares issued and outstanding, pro forma

     —          —         (c)        —    

Preferred Stock—15,000,000 authorized shares, no par value; and none issued and outstanding

     —          —            —    

Additional paid-in capital

     —          (143.0     (c)        (143.0

Net Parent investment

     1,445.8        (1,445.8     (c)        —    

Accumulated other comprehensive income

     137.3        —            137.3  
  

 

 

    

 

 

      

 

 

 

Total stockholders’ equity

     1,583.1        (1,588.8        (5.7

Noncontrolling interests

     4.3        —            4.3  
  

 

 

    

 

 

      

 

 

 

Total equity

     1,587.4        (1,588.8        (1.4
  

 

 

    

 

 

      

 

 

 

Total liabilities and equity

   $ 2,603.7      $ 203.4        $ 2,807.1  
  

 

 

    

 

 

      

 

 

 

See the accompanying notes to the unaudited pro forma combined condensed financial statements.

 

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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS

VONTIER CORPORATION

($ and shares in millions, except per share amounts)

 

     Nine Months Ended September 25, 2020  
     Historical     Pro Forma
Adjustments
    Notes     Pro Forma  

Sales

   $ 1,889.6     $ —         $ 1,889.6  

Cost of sales

     (1,064.2     —           (1,064.2
  

 

 

   

 

 

     

 

 

 

Gross profit

     825.4       —           825.4  

Operating costs:

        

Selling, general and administrative expenses

     (356.0     —           (356.0

Research and development expenses

     (93.7     —           (93.7

Impairment of goodwill

     (85.3     —           (85.3
  

 

 

   

 

 

     

 

 

 

Operating profit

     290.4       —           290.4  

Non-operating expense, net

     (1.2     (28.2     (d)       (29.4
  

 

 

   

 

 

     

 

 

 

Earnings before income taxes

     289.2       (28.2       261.0  

Income taxes

     (84.0     6.2       (e)       (77.8
  

 

 

   

 

 

     

 

 

 

Net earnings

   $ 205.2     $  (22.0     $ 183.2  
  

 

 

   

 

 

     

 

 

 

Net earnings per share:

        

Basic

   $ 1.22         (f)     $ 1.09  

Diluted

   $ 1.22         (f)     $ 1.09  

Average common stock and common equivalent shares outstanding:

        

Basic

     168.4         (f)       168.4  

Diluted

     168.4         (f)       168.4  

NEWCO

($ and shares in millions, except per share amounts)

 

     Year Ended December 31, 2019  
     Historical     Pro Forma
Adjustments
    Notes     Pro Forma  

Sales

   $ 2,772.1     $  —         $ 2,772.1  

Cost of sales

     (1,581.3     —           (1,581.3
  

 

 

   

 

 

     

 

 

 

Gross profit

     1,190.8       —           1,190.8  

Operating costs:

        

Selling, general and administrative expenses

     (491.3     —           (491.3

Research and development expenses

     (136.4     —           (136.4
  

 

 

   

 

 

     

 

 

 

Operating profit

     563.1       —           563.1  

Non-operating expense, net

     2.7       (43.1     (d)       (40.4
  

 

 

   

 

 

     

 

 

 

Earnings before income taxes

     565.8       (43.1       522.7  

Income taxes

     (129.3     10.4       (e)       (118.9
  

 

 

   

 

 

     

 

 

 

Net earnings

   $ 436.5     $ (32.7     $ 403.8  
  

 

 

   

 

 

     

 

 

 

Net earnings per share:

         (f)     $ 2.39  

Basic

         (f)     $ 2.39  

Diluted

        

Average common stock and common equivalent shares outstanding:

         (f)       168.4  

Basic

         (f)       168.4  

Diluted

        

See the accompanying notes to the unaudited pro forma combined condensed financial statements.

 

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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

For further information regarding the historical combined condensed financial statements, please refer to the audited combined financial statements and the unaudited combined condensed financial statements included in this prospectus. The Unaudited Pro Forma Combined Condensed Balance Sheet as of September 25, 2020 and Unaudited Pro Forma Combined Condensed Statement of Earnings for the nine-month period ended September 25, 2020 and the year ended December 31, 2019 include adjustments related to the following:

Unaudited Pro Forma Combined Condensed Balance Sheet

 

(a)

Reflects a pro forma adjustment to cash calculated as follows ($ in millions):

 

Gross proceeds from Credit Facility

   $ 1,800.0  

Less: Distribution of net proceeds from Credit Facility to Parent

     1,596.6  
  

 

 

 

Total pro forma adjustment for unremitted cash held by NEWCO

   $ 203.4  
  

 

 

 

In connection with the distribution, Parent transferred to us $203.4 million in cash balances and amounts due to banks. As of September 25, 2020, these adjusted amounts included cash held by us of $200.0 million (reflected as cash and equivalents in the accompanying Unaudited Pro Forma Combined Condensed Balance Sheet).

 

(b)

Reflects $1.8 billion of proceeds from the Credit Facility that we entered into in connection with the distribution, net of $7.8 million in financing costs. Proceeds from these borrowings were used to fund a payment to Parent of approximately $1.6 billion in connection with the distribution.

 

(c)

Reflects the Net Parent investment impact as a result of the post-separation and post-distribution capital structure. As of the distribution date, the Net Parent investment after reflecting the impact of the payment to Parent described in note (b) above was adjusted to reflect the distribution of 134.9 million outstanding shares of NEWCO common stock to Parent stockholders. NEWCO’s common stock account reflects an adjustment for the par value of the 168.4 million outstanding shares of NEWCO common stock, par value of $0.0001 per share, issued upon the distribution. NEWCO’s additional paid-in capital account reflects an adjustment related to the reclassification of Parent’s net investment in NEWCO. Parent’s net investment in NEWCO is allocated between common stock and additional paid in capital based on the number of shares of NEWCO common stock outstanding at the distribution date.

Unaudited Pro Forma Combined Condensed Statements of Earnings

 

(d)

Reflects estimated interest expense of $28.2 million and $43.1 million for the nine-month period ended September 25, 2020 and the year ended December 31, 2019, respectively, related to the borrowing entered into in connection with the distribution reflecting an estimated average borrowing cost of approximately 1.9% per annum. Estimated net interest expense includes deferred financing costs of $2.3 million and $3.0 million for the nine-month period ended September 25, 2020 and the year ended December 31, 2019, respectively. An increase of .125% in our estimated average would have resulted in an additional pro forma interest expense of approximately $1.7 million and $2.3 million for the nine-month period ended September 25, 2020 and the year ended December 31, 2019, respectively. Amount also reflects the elimination of $5.5 million of interest income from intercompany financing transactions with Fortive prior to the distribution for the year ended December 31, 2019. Interest income from intercompany financing transactions with Fortive was insignificant for the nine-month period ended September 25, 2020.

 

(e)

Reflects the tax effect of pro forma adjustments using the respective statutory combined state and federal tax rate of 22.2% and 24.1% for the nine-month period ended September 25, 2020 and the year ended December 31, 2019, respectively. This represents our U.S. statutory tax rate during the period, which differs from our effective tax rate as the adjustments to pro forma earnings before tax will be taxable in the U.S. The pro forma taxes have not been adjusted to reflect any change in our effective tax rate subsequent to the distribution.

 

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(f)

The number of shares used to compute pro forma basic and diluted earnings per share is based on the number of shares of Vontier common stock outstanding as of the separation date. This calculation does not take into account the dilutive effect resulting from the issuance of Vontier stock-based compensation awards in connection with the adjustment of outstanding Parent stock-based compensation awards held by Vontier employees or the grant of new stock-based compensation awards.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless the context otherwise requires, references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to NEWCO or the Company (“we”, “us”, or “our”) shall mean the businesses comprising NEWCO.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of the financial statements with a narrative from the perspective of the management of the Company. The MD&A should be read in conjunction with “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Condensed Financial Statements,” our audited combined financial statements for the years ended December 31, 2019, 2018 and 2017 and our unaudited combined condensed financial statements for the nine-month periods ended September 25, 2020 and September 27, 2019. The MD&A is divided into seven sections:

 

   

Basis of Presentation

 

   

Overview

 

   

Results of Operations

 

   

Risk Management

 

   

Liquidity and Capital Resources

 

   

Critical Accounting Estimates

 

   

New Accounting Standards

Basis of Presentation

The accompanying audited combined financial statements and unaudited combined condensed financial statements present the historical financial position, results of operations, changes in equity and cash flows of the Company in accordance with GAAP for the preparation of carved-out combined financial statements. Our business portfolio includes (i) mobility technologies, in which we are a leading worldwide provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management, and traffic management, as well as, (ii) diagnostics and repair technologies, in which we manufacture and distribute vehicle repair tools, toolboxes, automotive diagnostic equipment and software, and a full line of wheel-service equipment. Historically, these businesses had operated as part of Fortive’s Industrial Technologies segment. Given the interrelationships of the products, technologies, and customers, and resulting similar long-term economic characteristics, we meet the aggregation criteria and have combined our two operating segments into a single reportable segment. We use the term “Parent” to refer to Fortive.

Our historical combined financial statements include expense allocations for certain support functions that are provided on a centralized basis within Fortive, such as corporate costs, shared services and other selling, general and administrative costs that benefit the Company, among others. Pursuant to agreements with Fortive, Fortive provides us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees, and we expect to incur other costs to replace the services and resources that will not be provided by Fortive. We have and will continue incurring additional costs as a separate public company. As a separate public company, our total costs related to such support functions may differ from the costs that were historically allocated to us.

 

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These additional costs are primarily for the following:

 

   

additional personnel costs, including salaries, benefits and potential bonuses and/or share-based compensation awards for staff additions to replace support provided by Fortive that is not covered by the transition services agreement; and

 

   

corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees.

Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs.

We expect these incremental separate public company costs in excess of the costs that have been historically allocated to us to range between approximately $35 million and $45 million per year. Moreover, we expect Fortive or us to incur certain nonrecurring internal costs to implement certain new systems.

Additionally, our combined balance sheet may not be comparable to the opening balance sheet of the separate company, which will reflect the transfer by Fortive of the assets and liabilities of its Industrial Technologies segment to us. For a detailed description of our unaudited pro forma combined condensed financial statements, see “Unaudited Pro Forma Combined Condensed Financial Statements.”

We have historically operated as part of Fortive and not as a stand-alone company and previously had no separate legal status or existence. The combined financial statements have been derived from Fortive’s historical accounting records and are presented on a carved-out basis. All revenues and costs as well as assets and liabilities directly associated with our business activity are included as a component of the financial statements. The combined financial statements also include allocations to us of certain selling, general and administrative expenses from Fortive’s corporate office and from other Fortive businesses, as well as allocations of related assets, liabilities, and Net Parent investment, as applicable. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Fortive. Further, the historical combined financial statements may not be reflective of what our results of operations, comprehensive income, financial position, equity, or cash flows might be in the future as a separate public company. Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs. Pursuant to agreements with Fortive, Fortive provides us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees, and we expect to incur other costs to replace the services and resources that will not be provided by Fortive. Related party allocations are discussed further in Note 19 in the accompanying audited combined financial statements for the years ended December 31, 2019, 2018, and 2017, and in Note 10 in the accompanying unaudited combined condensed financial statements for the nine-month periods ended September 25, 2020 and September 27, 2019.

As part of Fortive, we were dependent upon Fortive for all of our working capital and financing requirements as Fortive used a centralized approach to cash management and financing of its operations. Financial transactions relating to us are accounted for through our Net Parent investment account. Accordingly, none of Fortive’s cash, cash equivalents, or debt held at the corporate level has been assigned to us in the audited combined financial statements. Management assesses our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We continue to 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 manage our capital structure on a short-term and long-term basis and to continue investing in existing businesses and consummating strategic acquisitions.

Net Parent investment, which includes retained earnings, represents Fortive’s interest in our recorded net assets. All significant transactions between Fortive and us have been included in the accompanying audited combined

 

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financial statements for the years ended December 31, 2019, 2018, and, 2017, and unaudited combined condensed financial statements for the nine-month periods ended September 25, 2020 and September 27, 2019. Transactions with Fortive are reflected in the accompanying Combined Statements of Changes in Equity and Cash Flows as “Net transfers to Parent” and in the accompanying Combined Balance Sheets within the Net Parent investment line item.

As part of Fortive, we engaged in intercompany financing transactions (“Related-party Borrowings”). Transactions with Fortive have been included in the accompanying audited combined financial statements and unaudited combined condensed financial statements for all periods presented. These transactions were settled prior to the consummation of the distribution. All other intercompany accounts and transactions between our businesses have been eliminated in the accompanying audited combined financial statements and the unaudited combined condensed financial statements for all periods presented.

Divestitures

On October 9, 2019, NEWCO sold its interest in Gilbarco Hungary ACIS and its Gilbarco Romania ACIS business (“ACIS”) for $1.7 million, and recognized a loss on the transactions of $0.1 million. These transactions did not meet the criteria for discontinued operations reporting, and therefore the operating results of ACIS prior to the disposition are included in continuing operations for all periods presented.

Overview

General

Please see “Our Company” for a discussion of our products, customer base, and strategy. We offer critical technical equipment, components, software and services for manufacturing, repair, and servicing in the mobility infrastructure industry worldwide. We supply a wide range of solutions, spanning advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow 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, 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. 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 Pacific, with the exception of Japan and Australia.

Recent Events

On September 29, 2020 (the “Closing Date”), the Company entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks, consisting of a three-year, $800.0 million senior unsecured delayed draw term loan facility (the “Three-Year Term Loans”), a two-year, $1.0 billion senior unsecured delayed draw term loan facility (the “Two-Year Term Loans” and together with the Three-Year Term Loans, the “Term Loans”) and a three-year, $750.0 million senior unsecured multi-currency revolving credit facility, including a $25.0 million sublimit for swingline loans and a $75.0 million sublimit for the issuance of letters of credit (the “Revolving Credit Facility” and, together with the Term Loans, the “Credit Facilities”). At the closing of the Credit Agreement, Vontier did not borrow any funds under the Credit Facilities. On October 9, 2020, the Company drew down the full $1.8 billion available under the Term Loans. The Company used the proceeds from the Term Loans to make payments to Fortive, with $1.6 billion used as part of the consideration for the contribution of certain assets and liabilities by the Company to Fortive in connection with the separation and with $200.0 million used as a preliminary adjustment to fund cash balances remaining with the Company.

 

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On October 9, 2020, Fortive completed the separation of Fortive’s Industrial Technologies business through a pro rata distribution of 80.1% of the outstanding common stock of Vontier to Fortive’s stockholders. To effect the separation, Fortive distributed to its stockholders two shares of Vontier common stock for every five shares of Fortive common stock outstanding held on September 25, 2020, the record date for the distribution. As of the date of separation, Vontier had $289.5 million in cash. The primary source of the cash on hand as of the date of separation was due to a transfer from Fortive as part of the separation agreement. Under the terms of the separation agreement, we repaid $86.1 million to Fortive in December 2020.

Refer to Note 13 of the Unaudited Combined Condensed Interim Financial Statements for additional information regarding subsequent events.

Business Performance and Outlook

Business Performance During the Three- and Nine-Months Ended September 25, 2020

A novel strain of coronavirus was first identified in Wuhan, China in December 2019, and subsequently declared a pandemic by the World Health Organization in March 2020 (“COVID-19”). This outbreak has surfaced in nearly all regions around the world, which resulted in governments implementing strict measures to help contain or mitigate the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, school and commercial facility closures, re-opening restrictions, among others (collectively “virus control measures”). Further, the U.S. Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency issued Guidance documents for use by businesses and states defining “critical-infrastructure” industries that may continue to operate despite the virus control measures implemented. These virus control measures led to slowdowns or shutdowns for businesses deemed both “essential” and “non-essential” in affected areas, causing significant disruption in the financial markets both globally and in the United States, especially in the second quarter. As of the end of the third quarter, the virus control measures have eased in most regions and all of our locations were open and operating.

Given the nature of our business, COVID-19 impacted our businesses and operating results during the nine months ended September 25, 2020 directly with reduced demand from customers operating in non-essential end-markets and indirectly with reduced demand created by macroeconomic disruption or disruption in adjacent end-markets. COVID-19 impacted our businesses and operating results broadly across all geographies, as virus control measures were deployed in most regions during the nine months ended September 25, 2020. Our business was impacted less in the third quarter by the virus control measures as restrictions began to ease and demand began to return.

While differences exist among our businesses, on an overall basis, demand for our hardware and software products and services decreased during the first two quarters of the year and increased during the three months ended September 25, 2020. As compared to the comparable periods of 2019, aggregate year-over-year total sales increased 4.5% for the three months ended September 25, 2020 and decreased 6.9% in the nine months ended September 25, 2020. Sales from existing businesses increased 5.6% during the three months ended September 25, 2020, as compared to the comparable period in 2019. The increase in total sales and sales from existing businesses during the three months ended September 25, 2020 was primarily driven by 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 Europay, Mastercard and Visa (“EMV”) global standards and other Mexico regulatory demand. We benefited in 2020 from the EMV global standard regulations, which have an extended deadline in the U.S. through April 2021. Given the demand that we experienced during 2020, we anticipate that 2020 will be the peak year for incremental demand associated with adoption of the EMV regulation. Our diagnostics and repair technologies portfolio also experienced strong demand across most product categories, most notably specialty and hardline tools. Sales from existing businesses declined 4.7% during the nine months ended September 25, 2020, as compared to the comparable period of 2019. The decrease in total sales and sales from existing businesses during the nine months ended September 25, 2020 was primarily

 

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due to the direct and indirect impacts of COVID-19. Changes in foreign currency exchange rates and other items negatively impacted our sales growth by 0.6% and 1.8% during the three and nine months ended September 25, 2020 compared to the comparable periods in 2019.

Geographically, year-over-year total sales and sales from existing businesses for the three months ended September 25, 2020 increased at a rate in the high-single digits in developed markets and sequentially improved to a decline of mid-single digits in high growth markets. This was primarily attributable to growth in North America at a rate in the low-double digits and partially offset by sequential improvement in Western Europe to a decline in the high-single digits, and a more than 20% decline in Asia.

Year-over-year total sales and sales from existing businesses for the nine months ended September 25, 2020 decreased at a low-single digit rate in developed markets and declined at a rate in the high-teens in high-growth markets. These movements were primarily driven by a decline in Europe at a high-single digit rate and a decline in Asia of more than 20%.

Outlook

During the first nine months of 2020, the worldwide capital markets were volatile and overall global economic conditions deteriorated significantly as a result of COVID-19 in the beginning of the second quarter of 2020, began to improve towards the end of the second quarter and continued to improve into the third quarter. While we expect overall sales and sales from existing businesses to grow on a year-over-year basis in the fourth quarter, we are continuing to monitor the impact of COVID-19 and geopolitical uncertainties and the corresponding impact to our businesses. We will also continue to monitor the other factors identified above in “Cautionary Statement Concerning Forward Looking Statements.”

We are closely monitoring the health of our employees, and have implemented safety protocols at our facilities to ensure the health and safety of our employees. In addition, we are continuing to monitor the financial health of our suppliers and customers, and their ability to maintain production capacity and meet our operational requirements. Individuals contracting or being exposed to COVID-19, or who are unable to report to work due to future virus control measures, may significantly disrupt production throughout our supply chain and negatively impact our sales channels. Further, our customers may be directly impacted by business curtailments or weak market conditions, and may not be willing or able to accept shipments of products, may cancel orders, and may not be able to pay us on a timely basis.

Despite the virus control measures in place in geographies critical to our supply chain, we have successfully implemented solutions to support our operations and have not experienced significant production material shortages, supply chain constraints, or distribution limitations impacting our operations as of the date of this Report.

To mitigate the impact of the economic conditions from the COVID-19 pandemic as well as any escalation of geopolitical uncertainties related to governmental policies toward international trade, monetary and fiscal policies, and relations between the U.S. and China, we will continue applying and deploying the Vontier Business System to actively manage our supply chain and drive operating efficiencies, and continue to collaborate with our customers and suppliers to minimize disruption to their businesses. Additionally, we will continue actively managing our working capital with a focus on maximizing cash flows and cost efficiency. We continue to assess market conditions and take actions as we deem necessary to appropriately position our businesses in light of the economic environment and geopolitical uncertainties.

Although recent volatility in the financial markets has not had a significant impact on our financial position, liquidity, and ability to meet our debt covenants as of the filing date of this prospectus, we continue to monitor the financial markets and general global economic conditions. Further, we utilized certain provisions of The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) enacted by the U.S. Government to provide

 

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additional short-term liquidity, including relief from employer payroll tax remittance, and expect to continue utilizing these benefits throughout 2020. We are also evaluating other potential income tax impacts of the CARES Act. If further changes in financial markets or other areas of the economy adversely affect our access to the capital markets, we would expect to rely on a combination of available cash and existing available capacity under our Credit Facilities to provide short-term funding. Refer to the “Liquidity and Capital Resources” section for additional discussion.

Business Performance During the Year Ended 2019

On an overall basis, demand for our hardware and software products and services increased during 2019 as compared to 2018, which resulted in aggregate year-over-year sales growth of 4.0%, and sales from existing businesses of 5.6%. Our continued application and deployment of the Vontier Business System, including investments in sales growth initiatives, as well as increased demand in both high-growth and developed markets and other business-specific factors discussed below, contributed to the overall sales growth from existing businesses. Additionally, on a year-over-year basis, the liability shift related to enhanced credit card security requirements for outdoor payment systems in the United States based on the Europay, Mastercard and Visa (“EMV”) global standards that was expected to occur in October 2020 and was subsequently extended to April 2021 is continuing to drive demand within our mobility technologies businesses. We expect EMV to continue driving demand for dispensers and payment systems in 2020.

Geographically, year-over-year sales from existing businesses grew 7% in North America, grew 15% in Latin America, and grew 3% in Asia (excluding India). Sales from existing businesses in Western Europe were up 1% year-over-year, while sales from existing businesses in India declined 20%.

Business Performance During the Year Ended 2018

On an overall basis, demand for our hardware and software products and services increased during 2018 as compared to 2017, which resulted in aggregate year-over-year sales growth of 6.7% and sales growth from existing businesses of 4.2%. Our continued application and deployment of the Vontier Business System including investments in sales growth initiatives, as well as increased demand in both high-growth and developed markets, and other business-specific factors discussed below contributed to overall sales growth from existing businesses. Additionally, on a year-over-year basis, the liability shift related to enhanced credit card security requirements in the United States based on the EMV global standards is continuing to drive demand within our mobility technologies businesses.

Geographically, year-over-year sales from existing businesses grew 3% in North America, grew 16% in Latin America, and grew 20% in Asia, with greater than 20% growth in China. Sales from existing businesses declined 4% in Western Europe.

 

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Results of Operations

Comparison of Results of Operations for the Three and Nine Months Ended September 25, 2020 and September 27, 2019

 

    Three Months Ended     Nine Months Ended  
($ in millions)   September 25, 2020     September 27, 2019     September 25, 2020     September 27, 2019  

Total sales

  $ 746.7   $ 714.4   $ 1,889.6   $ 2,028.8

Total cost of sales

    (415.4     (406.4     (1,064.2     (1,163.6
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    331.3     308.0     825.4     865.2

Operating costs:

       

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

    (121.1     (118.3     (356.0     (362.9

Research and development expenses (“R&D”)

    (31.6     (34.8     (93.7     (102.0

Goodwill impairment charge

    —         —         (85.3     —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

  $ 178.6   $ 154.9   $ 290.4   $ 400.3
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit as a % of sales

    44.4     43.1     43.7     42.6

SG&A as a % of sales

    16.2     16.6     18.8     17.9

R&D as a % of sales

    4.2     4.9     5.0     5.0

Operating profit as a % of sales

    23.9     21.7     15.4     19.7

Total Sales and Sales from Existing Businesses

The following table summarizes total aggregate year-over-year growth in sales from existing businesses during the three and nine months ended September 25, 2020 as compared to the comparable periods of 2019.

 

     % Change Three
Months Ended
September 25, 2020 vs.
Comparable 2019
Period
    % Change Nine Months
Ended September 25,
2020 vs. Comparable
2019 Period
 

Total revenue growth (GAAP)

     4.5     (6.9 )% 

Sales from existing businesses growth (Non-GAAP)

     5.6     (4.7 )% 

Impact of acquisitions and divestitures (Non-GAAP)

     (0.5 )%      (0.4 )% 

Impact of currency exchange rates (Non-GAAP)

     —       (1.1 )% 

Other (Non-GAAP)

     (0.6 )%      (0.7 )% 

Total sales and sales from existing businesses within our mobility technologies platform increased at a mid-single digit rate during the three months ended September 25, 2020 and decreased at a mid-single digit rate during the nine months ended September 25, 2020 as compared to the comparable periods of 2019. The year-over-year results during the three months ended September 25, 2020 were driven by 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 Europay, Mastercard and Visa global standards and Mexico regulatory demand. The year-over-year results during the nine months ended September 25, 2020 were driven by broad-based declines across all product categories and significant geographies, which was driven by COVID-19 virus control measures.

Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased at a mid-single digit rate during the three months ended September 25, 2020 and decreased at a mid-single digit rate during the nine months ended September 25, 2020 as compared to the comparable periods in 2019. The results in the three months ended September 25, 2020 were driven principally by strong demand across most

 

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product categories, most notably specialty and hardline tools, with sequential growth in tool storage. For the year-to-date period, the results were primarily driven by decreased demand across most product categories and reflect sharp declines in demand due to COVID-19 virus control measures early in the second quarter, which were partially offset by improvements in demand as the year progressed and virus control measures began to lift in certain jurisdictions.

Year-over-year changes in price had an insignificant impact on sales growth during three and nine months ended September 25, 2020 versus the comparable periods in 2019.

Cost of Sales

The cost of sales increase of $9.0 million for the three months ended September 25, 2020, as compared to the comparable period in 2019, is due primarily to higher year-over-year sales volumes from existing businesses as well as changes in foreign currency exchange rates.

The cost of sales decrease of $99.4 million for the nine months ended September 25, 2020, as compared to the comparable period in 2019, is primarily due to lower year-over-year sales volumes from existing businesses, lower year-over-year material costs and cost savings associated with restructuring and productivity improvement initiatives.

Gross Profit

The year-over-year increase in gross profit during the three months ended September 25, 2020, as compared to the comparable period in 2019, is primarily due to higher year-over-year sales volumes as well as favorable materials costs and productivity improvement initiatives and changes in foreign currency exchange rates.

The year-over-year decrease in gross profit during the nine months ended September 25, 2020, as compared to the comparable period in 2019, is primarily due to lower year-over-year sales volumes and changes in foreign currency exchange rates. This was partially offset by incremental year-over-year cost savings associated with restructuring, productivity improvement initiatives, and material cost and supply chain improvement actions.

The 130 basis point increase in gross profit margin during the three months ended September 25, 2020 as compared to the comparable period in 2019 is primarily due to higher year-over-year sales volumes.

The 110 basis point increase in gross profit margin during the nine months ended September 25, 2020 as compared to the comparable period in 2019 is primarily due to cost savings associated with restructuring and productivity improvement initiatives, and material cost and supply chain improvement actions, partially offset by lower year-over-year sales volumes.

Operating Costs and Other Expenses

SG&A expenses increased during the three months ended September 25, 2020, as compared to the comparable period in 2019, primarily due to stand-up costs and costs associated with the separation. This was partially offset by savings from reductions in discretionary spending, and to a lesser extent, year-over-year cost savings associated with restructuring and productivity improvement initiatives.

SG&A expenses decreased during the nine months ended September 25, 2020, as compared to the comparable period in 2019, primarily due to savings from broad cost reduction efforts that reduced labor expenses to better align with reductions in demand, primarily through the use of furloughs and reductions in salaried compensation costs, as well as other reductions in discretionary spending, and to a lesser extent, year-over-year cost savings associated with restructuring and productivity improvement initiatives. These factors were partially offset by costs associated with the separation.

 

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On a year-over-year basis, SG&A expenses as a percentage of sales decreased 40 basis points during the three months ended September 25, 2020, as compared to the comparable periods in 2019 due to the increase of sales as compared to the same period in 2019. For the nine months ended September 25, 2020, SG&A expenses as a percentage of sales increased 90 basis points due to year-over-year sales declines and costs associated with the separation which was partially offset by lower spending on sales and marketing growth initiatives.

R&D expenses (consisting principally of internal and contract engineering personnel costs) decreased during the three and nine months ended September 25, 2020, as compared to the comparable periods in 2019 due to broad cost reduction efforts. On a year-over-year basis, R&D expenses as a percentage of sales decreased during the three months ended September 25, 2020 due to the cost reduction measures which decreased R&D expenses while total sales increased. For the nine months ended September 25, 2020, R&D expenses as a percentage of sales remained flat as cost reduction measures in R&D expenses decreased R&D expenses while sales also decreased due to year-over-year sales volume declines.

In connection with our updated forecast for our Telematics business that indicated a decline in sales and operating profit to levels lower than previously forecasted, due in large part to the impacts of the COVID-19 pandemic, management determined the change in forecast indicated the related carrying value of goodwill may not be recoverable and performed a quantitative impairment assessment over the Telematics reporting unit on March 27, 2020. This analysis resulted in an impairment of $85.3 million.

Operating Profit

Operating profit margin increased 220 basis points during the three months ended September 25, 2020 as compared to the comparable period in 2019.

Year-over-year operating profit margin comparisons were favorably impacted by:

 

   

Higher year-over-year sales volumes, operating expense savings from broad cost reduction efforts and, to a lesser extent, lower material costs and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives — favorable 300 basis points

 

   

The year-over-year effect of businesses disposed of and acquired — favorable 20 basis points

Year-over-year operating profit margin comparisons were primarily impacted by the following unfavorable factors: stand-up costs related to the separation — unfavorable 100 basis points

Operating profit margin decreased 430 basis points during the nine months ended September 25, 2020 as compared to the comparable period in 2019.

Year-over-year operating profit margin comparisons were favorably impacted by:

 

   

Operating expense savings from broad cost reduction efforts, and to a lesser extent, lower material costs and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives which were partially offset by lower year-over-year sales volumes from existing businesses — favorable 100 basis points

 

   

The year-over-year effect of businesses disposed of and acquired — favorable 10 basis points

Year-over-year operating profit margin comparisons were unfavorably impacted by:

 

   

Stand-up costs related to the separation — unfavorable 90 basis points

 

   

The impact of the goodwill impairment of our Telematics business — unfavorable 450 basis points

 

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Comparison of Results of Operations for the Years Ended December 31, 2019 and December 31, 2018

 

     Year Ended  
($ in millions)    December 31,
2019
    December 31,
2018
 

Total sales

   $ 2,772.1     $ 2,665.9  

Total cost of sales

     (1,581.3     (1,530.8
  

 

 

   

 

 

 

Gross profit

     1,190.8       1,135.1  

Operating costs:

    

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

     (491.3     (499.3

Research and development expenses (“R&D”)

     (136.4     (136.2
  

 

 

   

 

 

 

Operating profit

   $ 563.1     $ 499.6  
  

 

 

   

 

 

 

Gross profit as a % of sales

     43.0     42.6

SG&A as a % of sales

     17.7     18.7

R&D as a % of sales

     4.9     5.1

Operating profit as a % of sales

     20.3     18.7

Total Sales and Sales from Existing Businesses

 

     2019 vs 2018  

Total Revenue Growth (GAAP)

     4.0
  

 

 

 

Sales from existing businesses (Non-GAAP)

     5.6

Impact of acquisitions and divestitures (Non-GAAP)

     0.5

Impact of currency Exchange Rates and Other (Non-GAAP)

     (2.1)

Total sales increased $106.2 million, or 4.0%, during 2019 as compared to 2018.

Sales from existing businesses within our mobility technologies portfolio grew 7.1% during 2019 as compared to 2018 due primarily to broad-based demand for fuel management systems, specifically in North America, Latin America, and Western Europe, as well as increased demand for payment solutions. The strong demand in North America was favorably impacted by the approaching deadline for the liability shift related to EMV global standards that was expected to occur in October 2020.

Geographically, sales from existing businesses increased on a year-over-year basis in North America, Europe, and Latin America, partially offset by declines in India.

Sales from existing businesses within our diagnostics and repair technologies portfolio grew 0.9% during 2019 as compared to 2018, largely driven by increased year-over-year demand for hardline and diagnostic tools and shop equipment that was mostly offset by a decline in demand for wheel-service equipment.

Year-over-year price increases contributed 1.5% to sales growth during 2019 as compared to 2018.

Cost of Sales

Cost of sales increased $50.5 million, or 3.3%, during 2019 as compared to 2018. The year-over-year increase in cost of sales was due primarily to higher year-over-year sales volumes from existing businesses, and to a lesser extent the incremental cost of sales from our recently acquired businesses, increased material costs associated primarily with inflationary pressures and recently enacted tariffs, and restructuring charges, which were partially

 

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offset by changes in currency exchange rates and incremental year-over-year cost savings associated with productivity improvement initiatives and material cost and supply chain improvement actions.

Gross Profit

The year-over-year $55.7 million increase in gross profit, or 40 basis points as a percentage of sales, during 2019 as compared to 2018 was due primarily to higher year-over-year sales volumes and the favorable impact of pricing improvements, and to a lesser extent, the impact of recently acquired businesses. Changes in foreign currency exchange rates and an unfavorable sales mix partially off-set the increase in gross profit.

Operating Costs and Other Expenses

SG&A decreased $8.0 million, or 100 basis points as a percentage of sales, during 2019 as compared to 2018. The decrease in SG&A was due primarily to savings from productivity improvement initiatives and changes in foreign currency exchange rates.

R&D (consisting principally of internal and contract engineering personnel costs) increased $0.2 million during 2019 as compared to 2018, and R&D expenses as a percentage of sales were relatively flat, as the investments in our product development initiatives grew at rate largely consistent with sales.

Operating Profit

Operating profit increased $63.5 million during 2019 as compared to 2018, and as a percentage of sales, increased from 18.7% of sales in 2018 to 20.3% of sales in 2019. The increase in operating profit was due primarily due to the following:

 

   

Higher 2019 sales volumes from existing businesses, price increases, and incremental year-over-year cost savings associated with productivity improvement initiatives, which were partially offset by increased material costs associated primarily with inflationary pressures and recently enacted tariffs, an unfavorable sales mix, and changes in currency exchange rates—favorable 195 basis points

 

   

The incremental year-over-year net dilutive effect of restructuring actions—unfavorable 25 basis points

 

   

The dilutive impact of recently divested businesses—unfavorable 10 basis points

Comparison of Results of Operations for the Years Ended December 31, 2018 and December 31, 2017

 

     Year Ended  
($ in millions)    December 31,
2018
    December 31,
2017
 

Total sales

   $ 2,665.9     $ 2,498.2  

Total cost of sales

     (1,530.8     (1,425.4
  

 

 

   

 

 

 

Gross profit

     1,135.1       1,072.8  

Operating costs:

    

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

     (499.3     (445.8

Research and development expenses (“R&D”)

     (136.2     (126.2
  

 

 

   

 

 

 

Operating profit

   $ 499.6     $ 500.8  
  

 

 

   

 

 

 

Gross profit as a % of sales

     42.6     42.9

SG&A as a % of sales

     18.7     17.8

R&D as a % of sales

     5.1     5.1

Operating profit as a % of sales

     18.7     20.0

 

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Total Sales and Sales from Existing Businesses

 

     2018 vs 2017  

Total Revenue Growth (GAAP)

     6.7
  

 

 

 

Sales from existing businesses (Non-GAAP)

     4.2

Impact of acquisitions and divestitures (Non-GAAP)

     2.7

Impact of Currency Exchange Rates and Other (Non-GAAP)

     (0.2 )% 

Total sales increased $167.7 million, or 6.7%, during 2018 as compared to 2017.

Sales from existing businesses within our mobility technologies portfolio grew 4.9% during 2018 as compared to 2017 due primarily to increased demand for fuel management systems, particularly in North America, India and China, that grew at a rate in the mid-teens, and increased demand for dispensers and payment solutions in North America that grew at a low-single digit rate. The strong demand in North America was favorably impacted by the approaching deadline, that was expected to occur in October 2020, for the liability shift related to EMV global standards.

Sales from existing businesses within our diagnostics and repair technologies portfolio grew 2.1% during 2018 as compared to 2017, largely driven by increased year-over-year demand for hardline and diagnostic tools and tool storage products.

Price increases are reflected as a component of the change in sales from existing businesses, and year-over-year price increases contributed 0.8% to sales growth during 2018 as compared to 2017.

Cost of Sales

Cost of sales increased $105.4 million, or 7.4%, during 2018 as compared to 2017. The year-over-year increase in cost of sales was largely due to the relative equal impacts of higher year-over-year sales volumes and the incremental cost of sales from recently acquired businesses, and to a lesser extent, higher material costs from recently enacted tariffs. Year-over-year cost savings associated with restructuring and productivity improvement initiatives partially offset the increase in cost of sales.

Gross Profit

The year-over-year $62.3 million increase in gross profit during 2018 as compared to 2017 was due primarily to higher year-over-year sales volumes, the impact of recently acquired businesses, the favorable impact of pricing improvements, and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives, all of which had relatively equal impacts on gross profit. The related 30 basis point decrease in gross profit margin during 2018 as compared to 2017 was primarily due to the dilutive impact of recently acquired businesses and unfavorable sales mix.

Operating Costs and Other Expenses

SG&A increased $53.5 million, or 90 basis points as a percentage of sales, during 2018 as compared to 2017. The increase in SG&A was due primarily to $15.0 million of additional investments in sales and marketing growth initiatives that grew at a rate consistent with sales, $12.2 million of bad debt expense from existing businesses that is mostly non-recurring, $6.3 million in higher amortization from recently acquired businesses, $3.5 million of higher depreciation largely resulting from investments in IT systems, and incremental expenses from recently acquired businesses, partially offset by savings from productivity improvement initiatives.

 

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R&D (consisting principally of internal and contract engineering personnel costs) increased $10.0 million during 2018 as compared to 2017 due to incremental year-over-year investments in product development initiatives and expenses from recently acquired businesses. On a year-over-year basis, R&D expenses as a percentage of sales were flat as the investments in product development initiatives grew at the same rate as sales.

Operating Profit

Operating profit decreased $1.2 million during 2018 as compared to 2017 and as a percent of sales, decreased from 20.0% of sales in 2017 to 18.7% of sales in 2018. The decrease in operating profit is due primarily due to the following:

 

   

Higher 2018 sales volumes from existing businesses, price increases and incremental year-over-year cost savings associated with restructuring and productivity improvement initiatives that were more than offset by continued investments in sales and marketing growth initiatives, higher bad debt expense, and unfavorable sales mix—unfavorable 90 basis points

 

   

The dilutive impact of recently acquired businesses—unfavorable 40 basis points

Income Taxes

General

Our operating results were included in Fortive’s consolidated U.S. federal and certain state income tax returns, as well as certain non-U.S. returns. We account for income taxes under the separate return method. Under this approach, income tax expense and deferred tax assets and liabilities are determined as if we were filing separate returns. Income tax expense and deferred tax assets and liabilities reflect management’s assessment of future taxes expected to be paid on items reflected in our financial statements. We record the tax effect of discrete items and items that are reported net of tax effects in the period in which they occur.

On December 22, 2017, the U.S. enacted comprehensive tax reform commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”). The U.S. government is still issuing significant amounts of TCJA guidance that we expect to continue into the foreseeable future. We are actively monitoring the impact of new Treasury Regulations. Any future adjustments resulting from retrospective guidance issued after September 25, 2020 will be considered as discrete income tax expense or benefit in the interim period the guidance is issued.

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, including legislative policy changes that may result from the Organization for Economic Co-operation and Development’s (“OECD”) initiative on Base Erosion and Profit Shifting.

The CARES Act is an emergency economic stimulus package in response to the COVID-19 outbreak which, among other things, contains numerous income tax provisions. Some of these tax provisions are expected to be effective retroactively for years ending before the date of enactment. We anticipate the provisions of the CARES Act will impact income tax in 2020, however we have not identified material impacts to the tax provision as of September 25, 2020. We will continue to evaluate the impact of the CARES Act as new clarifying guidance is issued throughout 2020.

When part of Fortive, the amount of income taxes we paid was subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. We perform a comprehensive review of 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.

 

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Comparison of the Nine-Month Periods Ended September 25, 2020 and September 27, 2019

Our effective tax rate for the three and nine months ended September 25, 2020 was 20.9% and 29.0%, respectively, as compared to 23.2% and 23.3% for the three and nine months ended September 27, 2019, respectively. The year-over-year decrease in the effective tax rate for the three months ended September 25, 2020 as compared to the comparable period in the prior year was primarily due to the favorable impact of a higher mix of income in jurisdictions with lower tax rates than the U.S. federal statutory rate of 21%. The year-over-year increase in the effective tax rate for the nine months ended September 25, 2020 as compared to the comparable period in the prior year was primarily due to a non-deductible goodwill impairment recognized in the first quarter. This was partially offset by favorable impacts of a higher mix of income in jurisdictions with lower tax rates than the U.S. federal statutory rate of 21% and increases in favorable impacts of certain federal and international tax benefits.

Our effective tax rate for both periods in 2020 and 2019 differs from the U.S. federal statutory rate of 21% due primarily to the impact of the TCJA, certain U.S. federal permanent differences, the impact of credits and deductions provided by law, and current year earnings outside the United States that are indefinitely reinvested and taxed at rates lower than the U.S. federal statutory rate. Specific to the nine months ended September 25, 2020, our effective tax rate also differs from the U.S. federal statutory rate of 21% due to a non-deductible goodwill impairment in the first quarter.

Comparison of the Years Ended December 31, 2019, 2018 and 2017

Our effective tax rate for the years ended December 31, 2019, 2018 and 2017 was 22.8%, 24.0% and 28.7%, respectively.

Our effective tax rate for 2019 and 2018 differs from the U.S. federal statutory rate of 21.0% due primarily to the effect of the TCJA U.S. federal permanent differences, the impact of credits and deductions provided by law, the mix of earnings outside the United States taxed at rates different than the U.S. federal statutory rate, and state tax impacts, exclusive of the impact of external interest expense as no external debt has been allocated by Fortive.

Our effective tax rate for 2017, including one-time impacts of the TCJA, differs from the U.S. federal statutory rate of 35.0% due primarily to net favorable impacts associated with the TCJA, mix of earnings outside the United States taxed at rates lower than the U.S. federal statutory rate, the impact of credits and deductions provided by law, and state tax impacts.

Inflation

The effect of inflation on our sales and net earnings was not significant for all periods presented.

Non-GAAP Financial Measure

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.

 

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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.

Risk Management

We are exposed to market risk from changes in foreign currency exchange rates, credit risk and commodity prices, each of which could impact our combined financial statements. We generally address 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.

Foreign Currency Exchange Rate Risk

We face transactional exchange rate risk from transactions with customers in countries outside 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 foreign operations into U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. The effect of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the accumulated other comprehensive income (loss) component of Parent’s equity. A 10% change in major currencies relative to the U.S. dollar at December 31, 2019 and September 25, 2020 would have resulted in a $87.4 million and $84.2 million impact to Parent’s equity, respectively.

Currency exchange rates negatively impacted reported sales during the nine-month period ended September 25, 2020 by 1.8% as compared to the comparable period in 2019, as the U.S. dollar was, on average, stronger against most major currencies during the first nine months of 2020 as compared to exchange rates during the comparable period of 2019. If the exchange rates in effect as of September 25, 2020 were to prevail throughout 2020, currency exchange rates would negatively impact 2020 estimated sales by approximately 1.2% relative to our performance in 2019. In general, additional weakening of the U.S. dollar against other major currencies would positively impact our sales and results of operations on an overall basis, and any further strengthening of the U.S. dollar against other major currencies would adversely impact our sales and results of operations.

 

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When part of Fortive, 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 financial statements.

Credit Risk

We are exposed to potential credit losses in the event of nonperformance by counterparties to our receivables from customers and franchisees. 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 resulting from COVID-19 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 10% increase or decrease in the expected loss rate on the consumer portfolio would have resulted in a change in the allowance for credit losses of approximately $4 million as of December 31, 2019 and $6 million as of September 25, 2020.

No customer accounted for more than 10% of combined sales during all periods presented.

Commodity Price Risk

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

Liquidity and Capital Resources

When part of Fortive, we were dependent upon Fortive for all our working capital and financing requirements as Fortive uses a centralized approach to cash management and financing of our operations. Financial transactions relating to us are accounted for through our Net Parent investment account. Accordingly, none of Fortive’s cash, cash equivalents or debt at the Fortive corporate level has been assigned to us in the accompanying financial statements.

As a result of the separation, the Company no longer participates in Fortive’s cash management and financing operations. Management assesses our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. We generate substantial cash from operating activities and expect that our operating cash flow and other sources of liquidity, including our Credit Facilities, will be sufficient to allow us to manage our capital structure over the next twelve months and continue to invest in existing businesses and consummating strategic acquisitions.

In September 2020, the Company completed the following financing transactions:

 

   

Entered into a credit agreement with a syndicate of banks providing for a three-year $800.0 million senior unsecured delayed draw term loan and a two-year $1.0 billion senior unsecured delayed draw term loan (together, the “Term Loans”). The Company borrowed $800.0 million and $1.0 billion of loans under the three-year term loan and two-year term loan, respectively.

 

   

Entered into a three-year $750.0 million senior unsecured revolving credit facility that expires on September 28, 2023 (together with the Term Loans, the “Credit Facilities”). The Company has not borrowed any amounts under the revolving credit facility as of December 22, 2020.

As of the date of separation, Vontier had $289.5 million in cash. The primary source of the cash on hand as of the date of separation was due to a transfer from Fortive as part of the separation agreement. Under the terms of the separation agreement, we repaid $86.1 million to Fortive in December 2020.

 

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Refer to Note 13 of the Unaudited Combined Condensed Interim Financial Statements for more information related to the Credit Facilities.

Overview of Cash Flows and Liquidity

Following is an overview of our cash flows and liquidity:

 

     Nine Months Ended     Year Ended December 31,  
($ in millions)    September 25,
2020
    September 27,
2019
    2019     2018     2017  

Net cash provided by operating activities

   $ 480.6     $ 322.3     $ 545.2     $ 421.0     $ 363.8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash paid for acquisitions and equity investments, net of cash received

   $ (9.5   $ (4.1 )   $ (2.4   $ (80.8   $ (190.4

Payments for additions to property, plant and equipment

     (27.3     (27.0     (38.0     (42.4     (68.4

Proceeds from sale of property

     0.5       —       0.1       0.6       0.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (36.3   $ (31.1   $ (40.3   $ (122.6   $ (258.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net transfers to Parent

     (23.4   $ (0.3   $ (299.4   $ (311.9   $ (117.1

Net proceeds from (repayments of) related-party borrowings

     (3.5     3.6     (190.5     16.3       (5.3

Net proceeds from (repayments of) short-term borrowings

     (419.9     (284.7     (2.5     8.8       8.7  

Other financing activity

     (0.7     (5.4     (7.4     (3.7     (1.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

   $ (447.5   $ (286.8   $ (499.8   $ (290.5   $ (114.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of Cash Flows for the Nine-Month Periods Ended September 25, 2020 and September 27, 2019

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 $480.6 million during the nine months ended September 25, 2020, an increase of $158.3 million, as compared to the comparable period in 2019. The year-over-year change in operating cash flows was primarily attributable to the following factors:

 

   

2020 operating cash flows were impacted by lower net earnings for the first nine months of 2020 as compared to the comparable period in 2019. Net earnings for the nine months ended September 25, 2020 were impacted by a year-over-year decrease in operating profits of $109.9 million. The year-over-year decrease in operating profit was impacted by the non-cash goodwill impairment charge of $85.3 million as well as an increase in stock-based compensation expense of $5.9 million. The goodwill impairment charge and stock-based compensation expense are non-cash expenses that decrease earnings without a corresponding impact to operating cash flows.

 

   

The aggregate of accounts receivable, long-term financing receivables, inventories, and trade accounts payable provided $95.5 million of operating cash flows during the first nine months of 2020 compared to using $22.4 million in the comparable period of 2019. The amount of cash flow generated from or used by the aggregate of accounts receivable, inventories and trade accounts payable depends upon how effectively we manage the cash conversion cycle and can be significantly impacted by the timing of collections and payments 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.

 

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The aggregate of prepaid expenses and other assets and accrued expenses and other liabilities provided $27.9 million of operating cash flows during the first nine months of 2020 as compared to using $36.4 million in the comparable period of 2019. This difference is due primarily to the timing of prepaid and accrued expenses and tax-related amounts deemed to be immediately settled with Fortive.

Net cash used in investing activities increased by $5.2 million during the nine months ended September 25, 2020 as compared to the comparable period in 2019 due to an increase in cash paid for equity investments.

Net cash used in financing activities increased by $160.7 million during the nine months ended September 25, 2020 as compared to the comparable period in 2019 primarily due to an increase in Net Transfers to Fortive of $135.2 million as well as an increase of $23.1 million for repayments of related-party borrowings with Fortive.

Comparison of Cash Flows for the Years Ended December 31, 2019 and December 31, 2018

Operating cash flows increased by $124.2 million during 2019 as compared to 2018.

 

   

2019 operating cash flows benefited from higher net earnings that were driven by higher operating profit. Depreciation decreased by $3.1 million and amortization increased by $1.2 million in 2019 compared to 2018. Depreciation and amortization are non-cash expenses that decrease earnings without a corresponding impact to operating cash flows.

 

   

The aggregate of Accounts receivable, Long-term financing receivables, Inventories, and Trade accounts payable provided $50.0 million of operating cash flows during 2019 compared to using $106.3 million of cash during 2018. The amount of cash flow generated from or used by the aggregate of Accounts receivable, Inventories and Trade accounts payable depends upon how effectively we manage the cash conversion cycle and can be significantly impacted by the timing of collections and payments in a period. Additionally, when we originate certain financing receivables, we assume the financing receivable by crediting the franchisee’s trade accounts receivable. As a result, originations of certain financing receivables are non-cash transactions.

 

   

The aggregate of Prepaid expenses and other assets and Accrued expenses and other liabilities used $51.8 million of operating cash flows in 2019 as compared to providing $35.6 million of operating cash flows in 2018. This difference is due primarily to the timing of prepaid and accrued expenses and tax-related amounts deemed to be immediately settled with Parent.

Net cash used in investing activities decreased by $82.3 million during 2019 as compared to 2018 due to businesses acquired in 2018 and a year-over-year decrease in capital expenditures.

Net cash used in financing activities increased by $209.3 million during 2019 as compared to 2018, due to cash settlements of related-party loans payable in 2019.

Comparison of Cash Flows for the Years Ended December 31, 2018 and December 31, 2017

Operating cash flows increased by $57.2 million during 2018 as compared to 2017.

 

   

2018 operating cash flows benefited from higher net earnings, including the impact of a decrease in the effective income tax rate, which was partially offset by the impact of the 2017 non-cash acquisition-related gain of $15.3 million and higher year-over-year depreciation and amortization of $20.3 million largely attributable to recently acquired businesses. Depreciation and amortization are non-cash expenses that decrease earnings without a corresponding impact to operating cash flows.

 

   

The aggregate of Accounts receivable, Long-term financing receivables, Inventories, and Trade accounts payable used $106.3 million of operating cash flows during 2018 compared to using $32.8 million of cash during 2017. The amount of cash flow generated from or used by the aggregate of Accounts receivable, Inventories and Trade accounts payable depends upon how effectively we manage the cash conversion cycle and can be significantly impacted by the timing of collections and payments in a period. Additionally, when we originate certain financing receivables, we assume the financing receivable by crediting the franchisee’s trade accounts receivable. As a result, originations of certain financing receivables are non-cash transactions.

 

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The aggregate of Prepaid expenses and other assets and Accrued expenses and other liabilities provided $35.6 million of operating cash flows in 2018 as compared to using $30.0 million of operating cash flows in 2017. This difference is due primarily to the timing of prepaid and accrued expenses and tax-related amounts deemed to be immediately settled with Parent.

Net cash used in investing activities decreased by $135.7 million during 2018 as compared to 2017 due to less cash paid for acquisitions and decreases in capital expenditures.

Net cash used in financing activities increased by $175.7 million during 2018 as compared to 2017, as more cash was transferred to Fortive due to decreases in investing cash outflows.

Contractual Obligations

The following table sets forth, by period due or year of expected expiration, as applicable, a summary of our contractual obligations as of December 31, 2019 under (1) purchase obligations, (2) operating lease obligations, and (3) other long-term liabilities reflected on the balance sheet under GAAP. There were no material changes in our contractual obligations during the nine-month period ended September 25, 2020. Refer to the “Recent Events” section above for details regarding the Credit Agreement entered into on September 29, 2020. The table below does not include debt outstanding under our Credit Facilities.

 

($ in millions)    Total      Less than
one year
     1-3 years      3-5 years      More than
5 years
 

Contractual obligations(a):

              

Purchase obligations(b)

   $ 130.8      $ 118.3      $ 12.5      $ —      $ —  

Operating lease obligations(c)

     44.9        13.7        13.7        5.7        11.8  

Other long-term liabilities reflected on the balance sheet under GAAP(d)

     295.5        —          46.0        24.4        225.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 471.2      $ 132.0      $ 72.2      $ 30.1      $ 236.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

All Related-party Borrowings were settled prior to the distribution, and as such, are excluded from this table.

(b)

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.

(c)

Includes future lease payments for operating leases having initial noncancelable lease terms in excess of one year.

(d)

Primarily consist of obligations under product service and warranty policies and allowances, performance and operating cost guarantees, litigation claims, postretirement benefits, pension benefit obligations, net tax liabilities and deferred compensation obligations. The timing of cash flows associated with these obligations is based upon management’s estimates over the terms of these arrangements and is largely based upon historical experience.

Off-Balance Sheet Arrangements

In the normal course of business, we periodically enter into agreements that require us to indemnify customers, suppliers or other business partners for specific risks, such as claims for injury or property damage arising out of the use of our products or claims alleging that our products infringe third party intellectual property. Historically, we have not experienced significant losses on these types of indemnification obligations.

Guarantees consist of outstanding standby letters of credit, bank guarantees, and performance and bid bonds. 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. We believe that if the obligations under these instruments were triggered, it would not have a material effect on our financial statements.

 

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On February 22, 2019, Fortive issued $1.4 billion in aggregate principal amount of its 0.875% Convertible Senior Notes due 2022 (the “Convertible Notes”). Certain of our subsidiaries issued unconditional guarantees, on a joint and several unsecured basis, with respect to Fortive’s outstanding Convertible Notes. Following the distribution, the unconditional guarantees provided by our subsidiaries were terminated.

The following table sets forth, by period due or year of expected expiration, as applicable, a summary of off-balance sheet commitments as of December 31, 2019. There were no material changes in our off-balance sheet commitments during the nine-month period ended September 25, 2020. Upon the distribution on October 9, 2020, the $1.4 billion related to unconditional guarantees provided by our subsidiaries were terminated.

 

     Amount of Commitment Expiration per Period  
($ in millions)    Total      Less Than
One Year
     1-3 Years      4-5 Years      More Than
5 Years
 

Guarantees

   $ 1,474.2      $ 6.9      $ 1,447.1      $ 7.8      $ 12.4  

Other Off-Balance Sheet Arrangements

We have, from time to time, divested certain of our businesses and assets. In connection with these divestitures, we often provide representations, warranties and/or indemnities to cover various risks and unknown liabilities, such as claims for damages arising out of the use of products or relating to intellectual property matters, commercial disputes, environmental matters or tax matters. We have not included any such items in the contractual obligations table above because they relate to unknown conditions and we cannot reasonably estimate the potential liabilities from such matters; but we do not expect that any such liability will have a material effect on our financial statements.

Legal Proceedings

Refer to Note 15 in the accompanying audited combined financial statements and Note 8 in the accompanying unaudited combined condensed financial statements for information regarding legal proceedings and contingencies. For a discussion of risks related to legal proceedings and contingencies, refer to the section entitled “Risk Factors” above.

Critical Accounting Estimates

Management’s discussion and analysis of our financial condition and results of operations is based upon our audited 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, as well as 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 combined financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the estimate is made, and (2) material changes in the estimate are reasonably likely from period to period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 2 to the accompanying combined financial statements.

Accounts and Financing Receivables: On January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Concurrent with our adoption of ASU 2016-13, we updated our methodology for estimating the allowance for credit losses as provided below:

 

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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 receivable 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.

Expected credit losses of the financing receivables originated during the nine months ended September 25, 2020, as well as changes to expected credit losses during the same period, are recognized in earnings.

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.

Recent deterioration in overall global economic conditions and worldwide capital markets as a result of the COVID-19 pandemic may negatively impact our customers’ ability to pay and, as a result, may increase the difficulty in collecting trade accounts and financing receivables. We did not realize notable increases in loss rates and delinquencies during the nine months ended September 25, 2020, and given the nature of our portfolio of receivables, our historical experience during times of challenging economic conditions, and our forecasted future impact of COVID-19 on our customers’ ability to pay, we did not record material provisions for credit losses as a result of the COVID-19 pandemic during the nine months ended September 25, 2020. If the financial condition of our customers were to deteriorate beyond our current estimates, resulting in an impairment of their ability to make payments, we would be required to write-off additional receivable balances, which would adversely impact our net earnings and financial condition.

Prior to the adoption of ASU No. 2016-13, the level of the allowances was based on many quantitative and qualitative factors including historical loss experience by receivable type, portfolio duration, delinquency trends, economic conditions and credit risk quality.

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 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. Refer to Note 4 to the accompanying audited combined financial statements.

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

 

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

In 2019, we had five reporting units for goodwill impairment testing. Reporting units resulting from recent acquisitions generally present the highest risk of impairment. We believe the impairment risk associated with these reporting units generally decreases as we integrate these businesses and better position them for potential future earnings growth. The carrying value of the goodwill included in each individual reporting unit ranges from $15.2 million to approximately $742.0 million. Our annual goodwill impairment analysis in 2019 indicated that, in all instances, the fair values of our reporting units exceeded their carrying values and consequently did not result in an impairment charge.

The excess of the estimated fair value over carrying value for each of our reporting units (expressed as a percentage of carrying value for the respective reporting unit) as of the annual testing date ranged from approximately 5.0% to approximately 1,300%.

In order to evaluate the sensitivity of the fair value calculations used in the goodwill impairment test, we applied a hypothetical 10% decrease to the fair values of each reporting unit and compared those hypothetical values to the reporting unit carrying values. Based on this hypothetical 10% decrease, the excess of the estimated fair value over carrying value for each of our reporting units (expressed as a percentage of carrying value for the respective reporting unit) ranged from approximately (5.0)% to approximately 1,200%. We evaluated other factors relating to the hypothetical fair value of the reporting unit that was below the carrying value, including results of the estimated fair value using an income approach, market positions of the businesses, comparability of market sales transactions and financial and operating performance, and concluded no impairment charge was required.

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

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

In connection with management’s updated forecast for the Telematics business that indicated a decline in sales and operating profit to levels lower than previously forecasted, due in large part to the impacts of the COVID-19 pandemic, management determined the change in forecast indicated the related carrying value of goodwill may not be recoverable and performed a quantitative impairment assessment over the Telematics reporting unit on March 27, 2020. This analysis resulted in an impairment of $85.3 million. Refer to Note 3 in the unaudited combined condensed financial statements for information regarding management’s assumptions used in determining the fair value of the reporting unit.

 

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Contingent Liabilities: As discussed in Note 15 to the accompanying audited combined financial statements, we are, from time to time, subject to a variety of litigation and similar contingent liabilities incidental to our business (or the business operations of previously owned entities). We recognize a liability for any contingency that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors, including those discussed in Note 15 to the accompanying audited combined financial statements. If the reserves established with respect to these contingent liabilities are inadequate, we would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our financial statements.

Revenue Recognition: We derive revenues from the sale of products and services. On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which superseded nearly all existing revenue recognition guidance. Refer to Note 11 to the accompanying audited combined financial statements for additional information on our adoption of this ASU. If our judgments regarding revenue recognition prove incorrect, our reported revenues in particular periods may be adversely affected. Historically, our estimates of revenue have been materially correct.

Stock-Based Compensation: For a description of our stock-based compensation accounting practices refer to Note 16 to the accompanying audited combined financial statements. Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require subjective assumptions, including the expected life of the awards, stock price volatility, and expected forfeiture rate. The assumptions used in calculating the fair value of stock-based payment awards represent our best estimates, but these estimates involve inherent uncertainties and the application of judgment. If actual results are not consistent with our assumptions and estimates, our equity-based compensation expense could be materially different in the future.

Pensions: For a description of our pension accounting practices refer to Note 10 to the accompanying audited combined financial statements. Certain of our employees participate in noncontributory defined benefit pension plans. Calculations of the amount of pension costs and obligations depend on the assumptions used in the actuarial valuations, including assumptions regarding discount rates, expected return on plan assets, rates of salary increases, mortality rates and other factors. If the assumptions used in calculating pension and other post-retirement benefits costs and obligations are incorrect or if the factors underlying the assumptions change (as a result of differences in actual experience, changes in key economic indicators or other factors), our financial statements could be materially affected. A 50 basis point reduction in the discount rates used for the plans during 2019 would have an insignificant effect to the amounts recorded in the financial statements as of December 31, 2019.

Our plan assets consist of various insurance contracts, equity and debt securities as determined by the administrator of each plan. The estimated long-term rate of return for the plans was determined on a plan by plan basis based on the nature of the plan assets and ranged from 2.75% to 6.00%. If the expected long-term rate of return on plan assets during 2019 was reduced by 50 basis points, the impact to pension expense in 2019 would be insignificant.

Income Taxes: For a description of our income tax accounting policies refer to Note 2 and Note 12 in the accompanying audited combined financial statements.

Our domestic and foreign operating results were included in the income tax returns of Parent. We account for income taxes under the separate return method. Under this approach, we determine our deferred tax assets and liabilities and related tax expense as if we were filing separate tax returns. The accompanying Combined Balance Sheets do not contain current taxes payable or other long-term taxes payable liabilities, with the exception of certain unrecognized tax benefits which will remain with us, as such amounts are deemed settled with Fortive when due and therefore are included in Parent’s equity. 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

 

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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 Combined Statements of Earnings. 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. Deferred tax liabilities generally represent items that have already been taken as a deduction on our tax return but have not yet been recognized as an expense in our Combined Statements of Earnings. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

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. We will retain certain tax liabilities associated with our separate tax return filings. Tax liabilities shown on returns that include both Fortive and our businesses, which will cover periods before the Distribution, will remain with Fortive.

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 audited combined financial statements. 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. Refer to Note 19 to the accompanying audited combined financial statements for a description of our corporate allocations and related party transactions.

New Accounting Standards

For a discussion of new accounting standards relevant to us, refer to Note 2 in the accompanying unaudited combined condensed financial statements.

 

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BUSINESS

Our Company

We are 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. We supply a wide range of solutions, spanning advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow 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, 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 administration operations are located in more than 30 countries across North America, Asia Pacific, Europe and Latin America.

We strive to create stockholder value through strong earnings growth, driven by continuous improvement in the operating performance of our existing business and acquisitions of other businesses that accelerate our strategy while expanding our portfolio into new and attractive markets.

To accomplish these goals, we use a set of growth, lean and leadership tools and processes, which is known as the Vontier Business System (“VBS”) and is derived from the Fortive Business System (“FBS”). The VBS is designed to continuously improve business performance in the critical areas of quality, delivery, cost, growth and innovation. Our operating companies utilize the Vontier Business System to develop improvement initiatives in the areas of product development and commercialization of new products and solutions as well as improvements in sales and marketing, supply chain and manufacturing efficiency. All of our efforts are focused on accelerating our competitive advantages in the markets we serve.

In the mobility technologies market, we are a leading global provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management (“telematics”), and traffic management, with products marketed under the Gilbarco, Veeder-Root, Orpak, Teletrac Navman and GTT brands. We market our products and services globally with approximately $500 million of our 2019 sales coming from high-growth markets. 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 Pacific (with the exception of Japan and Australia). We serve our major markets with local manufacturing, sales, and service capabilities that offer tailored solutions for local customers based on their unique needs. With research and development for our mobility technologies products supporting our local presence in global markets, we deliver innovative solutions to customers around the world.

Through our Gilbarco, Veeder-Root and Orpak businesses, we serve owners and operators of over 260,000 retail fuel stations and convenience stores globally. We market a suite of products, software and services to improve safety, environmental compliance and efficiency across our customers’ forecourts, stores and fuel supply chains. We have a large installed customer base with approximately 650,000 pay-at-pump devices and approximately 69,000 convenience stores utilizing our point-of-sale technology globally. We believe our substantial scale and sophisticated technology offerings strategically position us to capitalize on key market trends, including increasing vehicle ownership and infrastructure buildout, particularly in high-growth markets where we believe we have significant opportunities to expand our customer base.

Our telematics solutions are delivered as SaaS to commercial and government fleet operators to provide visibility into vehicle location, fuel usage, speed, mileage and other insights into their mobile workforce in order to improve safety and productivity. We believe that our differentiated technology and software solutions are positioned to benefit from increasing regulations worldwide governing driver safety, hours of service and recording and monitoring requirements. As of December 31, 2019, our telematics business had deployed solutions in over 480,000 vehicles worldwide.

 

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Our smart city solutions focus on improving safety, travel times, fuel costs and on-time performance of public transit and emergency vehicles. Our solutions connect and communicate with intersections, vehicles and emergency/transit operating systems to monitor, assess and take real-time action to change traffic flow so that emergency and transit vehicles get to their destinations as quickly and safely as possible. We believe our smart city solutions help make cities safer and more livable by improving response times of emergency service vehicles and the efficiency of public transport.

We also deliver a broad set of vehicle repair tools and equipment for professional mechanics and technicians under the Matco, Ammco and Coats brands. Matco markets its products and services to automotive dealers, repair shops and fleet maintenance facilities through a network of over 1,800 franchised mobile distributors. Franchisees purchase vehicle repair tools, equipment and services from us and resell to end customers directly. In 2019, our Matco franchisees served over 140,000 automotive repair shops and over 600,000 technicians. To complement our offering of Matco vehicle repair tools, we have developed a SaaS suite of diagnostic tools and software to enhance repair shop workflow and strengthen relationships with our customers. We also generate sales from initial and recurring franchise fees as well as various financing programs that include installment sales and lease contracts to franchisees. We believe that Matco’s integrated workflow and diagnostic solutions are well positioned to capitalize on the increasing complexity of vehicles as advanced driver-assistance systems and other vehicle automation systems become prevalent.

Through its Ammco and Coats brands, our Hennessy business produces and markets a full line of wheel-service equipment including brake lathes, tire changers, wheel balancers and wheel weights. Hennessy delivers its solutions through a strong distributor network to reach its primary customer base of tire installation and repair shops.

The chart below illustrates our 2019 sales based on end market and geography.

 

Sales for the Year Ended December 31, 2019

By Solution

  

By Geography

LOGO    LOGO

 

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The chart below illustrates the total amount and percentage of total sales contributed by similar products or services accounting for 10% or more of our combined sales for the years ended December 31 ($ in millions):

 

     2019     2018     2017  

Retail/commercial fueling

   $ 1,904.3     $ 1,768.1     $ 1,631.8  

Percentage of total

     68.7     66.3     65.3

Vehicle repairs

     510.3       503.6       492.5  

Percentage of total

     18.4     18.9     19.7

Other(a)

     357.5       394.2       373.9  

Percentage of total

     12.9     14.8     15.0
  

 

 

   

 

 

   

 

 

 

Total

   $ 2,772.1     $ 2,665.9     $ 2,498.2  
  

 

 

   

 

 

   

 

 

 

 

(a)

“Other” includes the Company’s Telematics, Smart City Solutions and Wheel Service Equipment products, each of which represents a single class of similar products or services that accounted for less than 10% of the Company’s combined revenue in each of the last three fiscal years.

Mobility Technologies Products

Through our mobility technologies products, we are a leading worldwide provider of solutions and services focused on fuel dispensing, remote fuel management, point-of-sale and payment systems, environmental compliance, vehicle tracking and fleet management, and traffic management. Our mobility technologies products are comprised of:

 

   

Retail/Commercial Fueling: Our retail/commercial petroleum products include environmental monitoring and leak detection systems; vapor recovery equipment; fuel dispenser systems for petroleum and compressed natural gas; high-speed chargers for EVs; point-of-sale and secure and automated electronic payment technologies for retail petroleum stations; submersible turbine pumps; and remote monitoring and outsourced fuel management SaaS offerings, including compliance services, fuel system maintenance, fleet management software solutions, and inventory planning and supply chain support. Typical users of these products include independent and company-owned retail petroleum stations, high-volume retailers, convenience stores and commercial vehicle fleets. Our retail/commercial petroleum products are marketed under a variety of brands, including ANGI, Gilbarco, Orpak, Red Jacket and Veeder-Root.

 

   

Telematics: Our telematics products include vehicle tracking and fleet management hardware and software solutions offered as SaaS that fleet managers use to position and dispatch vehicles, manage fuel consumption and promote vehicle and driver safety, compliance, operating efficiency and productivity. Typical users of these solutions span large and small fleet owners in a variety of industries and include businesses and other organizations that manage vehicle fleets. Our telematics products are marketed under a variety of brands, including Teletrac Navman.

 

   

Smart City: Our smart city solutions focus on improving public transportation travel times, fuel costs and on-time performance. Solutions connect and communicate with intersections, vehicles and emergency/transit operating systems to monitor, assess and take real-time action to change traffic flow so that emergency and transit vehicles get to their destinations as quickly and safely as possible. Typical users of these solutions include public transit and emergency vehicles with applications in broader public transport. Our smart city solutions are provided under a variety of brands, including GTT and Opticom.

Customers in this line of business choose suppliers based on several factors, including product features, performance and functionality, the supplier’s geographic coverage and the other factors described under “Competition.” Sales are generally made through independent distributors and our direct sales personnel.

 

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Market

 

Product

Category

 

Description

 

Est. Market
Size ($, bn)*

 

Est.
Growth**

LOGO   Retail /Commercial Fueling   Includes monitoring and leak detection systems, fuel dispenser systems, high-speed chargers for EVs, point-of-sale and secure and automated electronic payment technologies   ~$7.0   MSD
  Telematics   Includes vehicle tracking and fleet management hardware and software solutions   ~$5.0   HSD
  Smart City Solutions   Includes solutions that connect and communicate with intersections, vehicles and emergency / transit operating systems to change traffic flow   ~$8.0   MSD
     

 

 
   

Total Mobility Technologies

  ~$20.0   MSD
 

 

 

 

*

Based on 2019 industry sales and management estimates.

**

Based on the compound annual growth rates of large industry companies

Diagnostics and Repair Technologies Products

Our products consist of:

 

   

Vehicle Repairs: We manufacture and distribute vehicle repair tools, toolboxes and automotive diagnostic equipment and software through our network of franchised mobile distributors, who sell primarily to professional mechanics under the Matco brand.

 

   

Wheel-Service Equipment: We produce a full line of wheel-service equipment for automotive tire installation and repair shops, including brake lathes, tire changers, wheel balancers and wheel weights sold through direct sales personnel and independent distributors and distributed under various brands including the Ammco and Coats brands.

Customers in the line of business choose suppliers based on several factors, including relevant innovative features, convenience and the other factors described under “Competition.”

 

Market

 

Product

Category

 

Description

 

Est. Market
Size ($, bn)*

 

Est.
Growth**

LOGO   Vehicle Repairs   Includes vehicle repair tools, toolboxes and automotive diagnostic equipment and software   ~$6.0   LSD
  Wheel-Service Equipment   Includes full line of wheel-service equipment including brake lathes, tire changers, wheel balancers and wheel weights   ~$1.0   LSD
     

 

 

 

   

Total Diagnostics and Repair Technologies

  ~$7.0   LSD
     

 

 

 

 

*

Based on 2019 industry sales and management estimates

**

Based on the compound annual growth rates of large industry companies

Industry Overview

Mobility Infrastructure

The mobility infrastructure industry is broad and rapidly changing with the adoption of new technologies like autonomous driving, electric powertrains, mobile data connectivity and the development and evolution of smart cities, among other factors. We focus on niche, high-growth segments of the mobility infrastructure market with our unique portfolio of leading brands. Based on management’s estimates, the market size for mobility technologies is approximately $20.0 billion in annual sales and is expected to grow mid-single digits in 2020.

 

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Based on management’s estimates, the market size for diagnostics and repair technologies is approximately $7.0 billion in annual sales and is expected to grow low-single digits in 2020. Growth in our industry is driven by a broad array of factors, including global GDP, the size of the global car parc, and environmental, safety, payment regulation and vehicle complexity, among other factors.

Key Trends and Industry Drivers

We believe we are well positioned to take advantage of various key market trends in our industry:

 

   

Increasing vehicle ownership and infrastructure development in high-growth markets create attractive long-term tailwinds for our business

 

   

Global population growth and increased urbanization create infrastructure challenges that our product portfolio helps to address through telematics and our smart city solutions

 

   

Rising vehicle complexity and a shortage of qualified technicians are increasing the need for innovative diagnostic, calibration and repair solutions for automotive workshops and repair centers

 

   

Increasing regulation regarding enhanced payment security requirements

 

   

Enhanced focus on clean, efficient energy solutions driven by regulation regarding carbon dioxide emissions, improved technology and increasingly affordable alternatives

 

   

Increasing need for connected vehicle solutions globally and driver safety regulation is highlighting the need for recording, monitoring and the adoption of fleet management and telematics related solutions

 

   

Growing penetration of electric vehicles is creating emerging opportunities across the “mobility infrastructure industry”

Our Competitive Strengths

We believe we have significant competitive strengths driven by our unique culture and our leading global positions across key market segments. Some of our key competitive advantages are:

 

   

Strategically Positioned with Leading Brands in Attractive Markets. Many of our operating companies have been leaders in their respective markets for decades and we believe have built brand recognition and share positions that exceed many of their competitors. Gilbarco is a global brand recognized for its breadth of technology and ability to serve customers around the world. Veeder-Root is an established brand with over a one hundred fifty-year history that is well-known for deep environmental monitoring expertise and strength of technology. Our Matco brand is well recognized by customers for high quality and superior customer satisfaction delivered through a strongly committed franchise network. Hennessy, through its Coats branded tire changer, brake lathe and wheel balancing machines, is a leading wheel-service manufacturer. Teletrac and Navman are leading fleet management brands in several U.S. and international markets.

 

   

Global Presence and Reach. We operate globally, with diverse sales channels, manufacturing operations and product development that enable us to competitively address local requirements. We have experienced management teams located in key markets around the world, providing a strong local presence in high-growth markets.

 

   

Investment in EV Technology. We believe we are well positioned to leverage the growing EV market with our minority investments in Tritium and Driivz. Tritium is a technology leader in high-speed charging for EVs and has a global footprint, with installations in 30 countries, and is a leader in the European market with approximately 2,700 high-speed chargers deployed globally. Tritium’s leading technology combined with our global footprint allows for us to leverage our global sales and service network to accelerate penetration of this fast growing market as EVs become a growing part of the global car parc. Driivz is an intelligent cloud-based software platform supporting EV service providers

 

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with operations management, energy optimization, billing and roaming capabilities, as well as driver self-service apps. The Tel Aviv, Israel-based company offers solutions currently used by more than 500,000 drivers and supporting over 130 types of charging stations.

 

   

A Strong Position in Connected and Integrated Workflow Solutions. With Veeder-Root’s Insite360 SaaS offerings, we believe we have a long runway of opportunities for a data analytics business on the forecourt, in-store and in fuel supply chain. We have a range of premier applications and unique “single pane of glass” offerings to connect the applications. In our Matco business, our growing line of diagnostic solutions is enhancing shop workflow with point of use information and repair services and strengthening our relationships and branding in the workshop.

 

   

Attractive Margins and Strong Cash Flow Generation. Our business benefits from attractive margins and a track record of strong cash flow generation. We have a strong base of recurring sales, representing approximately mid-20% of our sales in 2019, to mitigate volatility and cyclicality across our business portfolio and over the past three years through 2019, consistently realized income profit margins of over 14%. Our cash flow generation is enhanced by low capital requirements, with capital expenditures averaging approximately 2% of sales over those three years. Our stable free cash flows will enable us to deploy capital to fund strategic initiatives, organic growth opportunities and acquisitions.

 

   

Vontier Business System. Our operating businesses within our business portfolio have leveraged the fundamental FBS tools and have driven results through FBS for decades. We believe that our ability to continually improve quality, delivery, cost, growth and innovation through our Vontier Business System will improve customer satisfaction and accelerate significant competitive advantage.

Our Business Strategy

Our strategy is to maximize stockholder value through several key initiatives:

 

   

Build Competitive Advantage Through Innovation That Our Customers Value In the markets we serve, we strive to drive organic growth by prioritizing the voice of our customers in everything we do. Over time, our focus on customers’ needs has enabled us to innovate effectively in markets where competitive leadership can be attained and, over long periods, sustained. Innovation and product vitality are key factors in maintaining our market leadership positions. In many end markets, we are among the leaders in the evolution of solutions to more software-driven products and business models, where our long history of reliability and strong brands position our product and service offerings at the key points of customer workflows.

 

   

Leverage and Expand Our Global Business Presence. Approximately 35% of our sales were generated outside the U.S. in 2019, and we have significant operations around the world in key geographic markets. This reach has facilitated our entry into new markets, as we have been able to harness existing sales channels and capitalize on our familiarity with local customer needs and regulations and the experience of our locally-based management resources. We have increased revenues generated in high-growth markets from approximately 14% in 2016 to approximately 18% in 2019, and we expect to continue to prioritize development of localized solutions for high-growth markets around the world, with strong local manufacturing and product development capabilities. We also intend to continue to pursue acquisitions of, and investments in, businesses that complement our strategy in specific markets or regions.

 

   

Attract and Retain Talented Employees. We believe that our team of talented employees, united by a common culture in pursuit of continuous improvement, provides us a significant competitive advantage. We seek to continue to attract, develop and retain world-class leaders and employees globally and to drive their engagement with our customer-centric approach. We will continue to closely align individual incentives to our and our stockholders’ objectives.

 

   

Drive Continuous Improvement Through Application of Our Vontier Business System. All of our operations and employees use our business system founded on FBS to drive continuous improvement,

 

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measured by metrics such as quality, delivery, cost, growth and innovation. Through consistent application of business system tools and principles, we have been able to drive strong customer satisfaction and profitability in product and service lines that have been in our business portfolio for years while also driving significant improvement in growth and operating margins in product and service lines that we acquire. Our business system extends well beyond lean concepts, to include methods for driving growth and innovation demanded in our markets.

 

   

Redeploy Our Free Cash Flow to Grow and Improve Our Business Portfolio. We intend to continue to re-invest the substantial free cash flow generated by our existing business portfolio to drive innovation for organic growth and to acquire businesses that fit strategically or extend our business portfolio into new and attractive markets. We believe that we have developed considerable skill in identifying, acquiring and integrating new businesses. Our track record of disciplined success in targeting and effectively integrating acquisitions is an important aspect of our growth strategy.

Research and Development

We conduct research and development activities for the purpose of developing new products, enhancing the functionality, effectiveness, ease of use and reliability of our existing products and expanding the applications for which uses of our products are appropriate. Research and development costs are expensed as incurred.

Manufacturing and Service Capabilities

We currently operate 20 manufacturing and 10 service facilities across 14 countries worldwide. Our facilities are strategically located near our customers to in order to provide tailored solutions for local customers based on their unique needs.

Materials

Our manufacturing operations employ a wide variety of raw materials, including electronic components, steel, plastics and other petroleum-based products, cast iron, aluminum and copper. Prices of oil and gas affect our costs for freight and utilities. We purchase raw materials from a large number of independent sources around the world. No single supplier is material, although for some components that require particular specifications or qualifications there may be a single supplier or a limited number of suppliers that can readily provide such components. We utilize a number of techniques to address potential disruption in and other risks relating to our supply chain, including in certain cases the use of safety stock, alternative materials and qualification of multiple supply sources.

During 2019, we had no raw material shortages that had a material effect on our business. For a further discussion of risks related to the materials and components required for our operations, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

Intellectual Property

We own numerous patents, trademarks, copyrights and trade secrets and licenses to intellectual property owned by others. Although in aggregate our intellectual property is important to our operations, we do not consider any single patent, trademark, copyright, trade secret or license to be of material importance to our business as a whole. From time to time we engage in litigation to protect, defend or enforce our intellectual property rights, and may also be subject to claims that we infringe, misappropriate or otherwise violate the intellectual property of others. For a discussion of risks related to our intellectual property, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

Competition

We believe that we are a leader in many of our served markets. Although we generally operate in highly competitive markets, our competitive position cannot be determined accurately since none of our competitors

 

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offer all of the same product and service lines or serve all of the same markets as we do. Because of the range of the products and services we sell and the variety of markets we serve, we encounter a wide variety of competitors, including well-established regional competitors, competitors who are more specialized than we are in particular markets, as well as larger companies or divisions of larger companies with substantial sales, marketing, research and financial capabilities. We face increased competition in a number of our served markets as a result of the entry of competitors based in low-cost manufacturing locations and increasing consolidation in particular markets. The number of competitors varies by product and service line. Our management believes that we have a market leadership position in most of the markets we serve. Key competitive factors vary among our products and service lines but include the specific factors noted above with respect to each particular product or service line, and typically also include price, quality, performance, delivery speed, applications expertise, distribution channel access, service and support, technology and innovation, breadth of product, service and software offerings and brand name recognition. For a discussion of risks related to competition, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

Seasonal Nature of Business

General economic conditions impact our business and financial results, and certain portions of our business experience seasonal and other trends related to the industries and end markets that they serve. For example, capital equipment sales are often stronger in the fourth calendar quarter and sales to OEMs are often stronger immediately preceding and following the launch of new products. However, as a whole, we are not subject to material seasonality.

Working Capital

We maintain an adequate level of working capital to support our business needs. There are no unusual industry practices or requirements relating to working capital items. In addition, our sales and payment terms are generally similar to those of our competitors.

Backlog

Backlog includes unfulfilled orders and the annual average contract value of signed contracts for our SaaS product offerings. Backlog as of December 31, 2019 and 2018 was $387.8 million and $452.5 million, respectively. Given the relatively short delivery periods and rapid inventory turnover that are characteristic of most of our products and the shortening of product life cycles, we believe that backlog in 2019 is indicative of short-term sales performance but not necessarily a reliable indicator of medium or long-term sales performance.

Human Capital Resources

As of December 31, 2019, we employed approximately 8,400 persons, of whom approximately 3,700 were employed in the U.S. and approximately 4,700 were employed outside of the U.S. Of our U.S. employees, approximately 930 were hourly-rated, unionized employees. Outside the U.S., we have government-mandated collective bargaining arrangements and union contracts in certain countries, particularly in Europe where certain of our employees are represented by unions and/or works councils. For a discussion of risks related to employee relations, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

Government Contracts

Although the substantial majority of our sales in 2019 was from customers other than governmental entities, we have agreements relating to the sale of products to government entities. As a result, we are subject to various statutes and regulations that apply to companies doing business with governments and government-owned entities. For a discussion of risks related to government contracting requirements, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

 

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Regulatory Matters

We face extensive government regulation both within and outside the United States relating to the development, manufacture, marketing, sale and distribution of our products, software and services. The following sections describe certain significant regulations that we are subject to. These are not the only regulations that our business must comply with. For a description of risks related to the regulations that our business is subject to, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

Environmental Laws and Regulations

Our operations and properties are subject to laws and regulations relating to environmental protection, including those governing air emissions, water discharges and waste management, and workplace health and safety. For a discussion of the environmental laws and regulations that our operations, products and services are subject to and other environmental contingencies, please refer to Note 15 to the audited Combined Financial Statements included in this prospectus. For a discussion of risks related to compliance with environmental and health and safety laws and risks related to past or future releases of, or exposures to, hazardous substances, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

Export/Import Compliance

We are required to comply with various U.S. export/import control and economic sanctions laws, such as:

 

   

the Export Administration Regulations administered by the U.S. Department of Commerce, Bureau of Industry and Security, which, among other things, impose licensing requirements on the export, in-country transfer and re-export of certain dual-use goods, technology and software (which are items that have both commercial and military or proliferation applications);

 

   

the regulations administered by the U.S. Department of Treasury, Office of Foreign Assets Control, which implement economic sanctions imposed against designated countries, governments and persons based on United States foreign policy and national security considerations; and

 

   

the import regulations administered by U.S. Customs and Border Protection.

Other nations’ governments have implemented similar export/import control and economic sanction regulations, which may affect our operations or transactions subject to their jurisdictions. For a discussion of risks related to export/import control and economic sanctions laws, please refer to the section entitled “Risk Factors—General Risk Factors”

International Operations

We are a global industrial technologies company. Our products and services are available in markets worldwide, and our principal markets outside the United States are in Europe, Asia, Middle East and Latin America. We also have operations around the world, and this geographic diversity allows us to draw on the skills of a worldwide workforce, provides greater stability to our operations, allows us to drive economies of scale, provides sales that may help offset economic trends that are specific to individual economies and offers us an opportunity to access new markets for products. In addition, we believe that our future growth depends in part on our ability to continue developing products and sales models that successfully target high-growth markets.

The manner in which our products and services are sold outside the U.S. differs by end market and by region. Most of our sales in non-U.S. markets are made by our subsidiaries located outside the U.S., though we also sell directly from the U.S. into non-U.S. markets through various representatives and distributors and, in some cases, directly. In countries with low sales volumes, we generally sell through representatives and distributors. For a discussion of risks related to our non-U.S. operations and foreign currency exchange, please refer to the section entitled “Risk Factors—Risks Related to Our Business.”

 

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Major Customers

No customer accounted for more than 10% of combined sales in 2019, 2018 or 2017.

Properties

Our corporate headquarters are located in Raleigh, North Carolina, in a facility that we lease. As of December 31, 2019, our facilities included 133 facilities, including 34 significant facilities, which are used for manufacturing, distribution, warehousing, research and development, general administrative and/or sales functions. 13 of these significant facilities are located in the U.S. in 9 states and 21 are located outside the U.S. in 13 other countries, primarily in Asia Pacific, Europe and Latin America. These significant facilities cover approximately 3.3 million square feet, of which approximately 2.1 million square feet are owned and approximately 1.2 million square feet are leased. Particularly outside the U.S., facilities may be used for multiple purposes, such as administration, sales, manufacturing, warehousing and/or distribution.

We consider our facilities suitable and adequate for the purposes for which they are used and do not anticipate difficulty in renewing existing leases as they expire or in finding alternative facilities. We believe our properties and equipment have been well-maintained. Please refer to Note 14 to the audited Combined Financial Statements included in this prospectus for additional information with respect to our lease commitments.

Legal Proceedings

We are, from time to time, subject to a variety of litigation and other legal and regulatory proceedings and claims incidental to our business. Based upon our experience, current information and applicable law, we do not believe that these proceedings and claims will have a material effect on our financial position, results of operations or cash flows. Please refer to Note 15 to the audited Combined Financial Statements in this prospectus for more information.

 

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MANAGEMENT AND DIRECTORS

Executive Officers

The following table sets forth information, as of December 22, 2020, with respect to the individuals who serve as our executive officers, including their positions, and is followed by a biography of each such individual.

 

Name

   Age     

Position

Mark D. Morelli

     56      President and Chief Executive Officer; Director Nominee

David H. Naemura

     51      Senior Vice President, Chief Financial Officer and Treasurer

Kathryn K. Rowen

     41      Senior Vice President and General Counsel

Andrew Nash

     56      Senior Vice President, Human Resources

Mark D. Morelli has served as our President and Chief Executive Officer since January 2020 and will serve as a member of our Board of Directors commencing immediately upon completion of the distribution. Mr. Morelli previously served as President and Chief Executive Officer of Columbus McKinnon Corporation from February 2017 to January 2020 and prior to that served as President and Chief Operating Officer of Brooks Automation, Inc. from January 2012 to March 2016. Prior to serving at Brooks Automation, Inc., Mr. Morelli was the Chief Executive Officer of Energy Conversion Devices, an alternative energy company (which voluntarily filed a petition for relief under Chapter 11 of the U.S. Bankruptcy Code within one year after the date on which Mr. Morelli ceased to serve as its Chief Executive Officer). Prior to that, Mr. Morelli served in various positions with United Technologies Corporation from June 1993 to September 2007, where he progressed through product management, marketing, strategy and increasing responsibilities of general management. Mr. Morelli began his career as a U.S. Army officer and helicopter pilot, serving as a company commander of an attack helicopter unit. Mr. Morelli brings to us a track record of delivering strong operational results and driving improvements in innovation to accelerate long-term growth and has demonstrated a strategic ability to build a company for long-term success.

David H. Naemura has served as our Senior Vice President, Chief Financial Officer and Treasurer since February 2020. Mr. Naemura previously served as Chief Financial Officer of Gates Industrial Corporation from March 2015 to January 2020. Prior to his time at Gates Industrial Corporation, Mr. Naemura served as Vice President of Finance and Group Chief Financial Officer at Danaher Corporation from April 2012 to March 2015, overseeing many of the businesses within our portfolio, and previously served as Danaher Corporation’s Test & Measurement Communications Platform CFO from January 2009 to April 2012. Prior to serving at Danaher Corporation, Mr. Naemura was employed by Tektronix Corporation from August 2000 to January 2009, including during its acquisition by Danaher Corporation in 2007.

Kathryn K. Rowen has served as our Senior Vice President and General Counsel since September 2020 and prior thereto served as Vice President, Corporate Social Responsibility, Employment and Litigation of Fortive Corporation from January 2020 to August 2020. Ms. Rowen also served as Vice President, Labor & Employment and Litigation from January 2017 to January 2018 of Fortive Corporation. Prior to joining Fortive Corporation, Ms. Rowen served at Raytheon Company in legal roles of increasing responsibility from October 2011 to January 2017.

Andrew Nash has served as our Senior Vice President, Human Resources since January 2020 and prior thereto served as Vice President, Global Human Resources (Transportation Technologies & Franchise Distribution) of Fortive Corporation from August 2018 to December 2019 and as Vice President, Global Human Resources (Transportation Technologies) of Fortive Corporation from July 2016 to August 2018. Prior to his time at Fortive Corporation, Mr. Nash served at Gilbarco Inc., a subsidiary of Danaher Corporation, as Vice President, Global Human Resources from December 2009 to July 2016.

 

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Board of Directors

The following table sets forth information, as of December 22, 2020, with respect to the individuals who serve on the Board, and is followed by a biography of each such individual.

 

Name

   Age     

Position

Mark D. Morelli

     56      President and Chief Executive Officer; Director

Karen C. Francis

     58      Chair; Director

Gloria R. Boyland

     60      Director

Martin Gafinowitz

     62      Director

Christopher J. Klein

     57      Director

Andrew D. Miller

     60      Director

The biography of Mark D. Morelli is set forth under the section entitled “Management–Executive Officers.”

Karen C. Francis served on the Board of Directors of Telenav, Inc. from December 2016 to November 2019. Ms. Francis served as lead independent director, chair of the Compensation Committee and a member of the Nominating and Governance Committee of Telenav, Inc. Prior to that, she served as a director of The Hanover Insurance Group, Inc. from May 2014 to May 2017 and AutoNation, Inc. from February 2016 to April 2018. In addition, Ms. Francis serves as Senior Advisor to TPG Capital and is an independent director for private equity and venture capital funded companies in Silicon Valley, including Metawave, Nauto and Wind River. Ms. Francis served as Chief Executive Officer of AcademixDirect, Inc., a technology innovator in education, from 2009 to 2014 and as its Executive Chairman from 2009 to 2017. From 2004 to 2007, Ms. Francis was Chairman and Chief Executive Officer of Publicis & Hal Riney, based in San Francisco and part of the Publicis global advertising and marketing network. From 2001 to 2002, she served as Vice President of Ford Motor Company, where she was responsible for the corporate venture capital group, as well as global e-business strategies, customer relationship management and worldwide export operations. From 1996 to 2000, Ms. Francis held several positions with General Motors, including serving as General Manager of the Oldsmobile Division. Ms. Francis brings to our Board of Directors her experience as a Chief Executive Officer, director, strategic advisor and investor with a deep knowledge of corporate governance and a strong track record of successfully building companies and businesses across multiple industries and sizes.

Gloria R. Boyland has served as a member of the Board of Chesapeake Energy Corporation (NYSE: CHK) since December 2016. Ms. Boyland serves as a member of the Audit and Nominating and Governance Committees of Chesapeake Energy Corporation. Ms. Boyland was Corporate Vice President of Operations & Service Support, responsible for leadership of operational cost reduction and process improvement initiatives, operations technology innovation, service quality improvement, customer experience, and new service offerings, at FedEx Corporation (NYSE: FDX), a $50 billion global transportation service provider, until her retirement in January 2020. Ms. Boyland joined FedEx Corporation in 2004 and was Staff Vice President, Service Experience Leadership from 2004—2015. Prior to joining FedEx, she held a broad variety of positions with increasing responsibility, including Customer Experience Management, Quality Management Systems, Business Development, Acquisition Integration, and general management. Ms. Boyland received a FedEx Corporate Five Star Award for the transformation of its Service Quality Index, which internally measures critical experience touchpoints that drive FedEx customer loyalty. Ms. Boyland currently sits on the board of the Memphis Brooks Museum and is a sponsor for Teach For America. Ms. Boyland brings to our Board of Directors significant operational and logistical experience. In addition, through her leadership role with a large, global company in the transportation industry, she has insight into the business practices that are critical to the success of Vontier.

Martin Gafinowitz has served as a member of our Board of Directors since September 2019 and was previously a Senior Vice President of Fortive Corporation from July 2016 to October 2020. Prior to July 2016, Mr. Gafinowitz served as Senior Vice President-Group Executive of Danaher from March 2014 to July 2016 after serving as Vice President-Group Executive of Danaher from 2005 to March 2014. Mr. Gafinowitz brings to

 

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our Board of Directors extensive prior experience in our businesses and our industry from his service as a Senior Vice President of Fortive and of Danaher.

Andrew D. Miller has served on the Board of Directors of iRobot Corporation since September 2016. Mr. Miller serves as chair of the Audit Committee and a member of the Nominating and Governance Committee of iRobot Corporation. Mr. Miller has also served on the Board of Directors of Verint Systems Inc., a global software and cloud provider of Actionable Intelligence solutions, since December 2019. Mr. Miller is a member of the Audit Committee of Verint Systems Inc. Mr. Miller most recently served as executive vice president and chief financial officer of PTC, a provider of software technology platforms and solutions, from early 2015 until May 2019. At PTC, he was responsible for global finance, tax and treasury, investor relations, information technology, pricing, corporate real estate, and customer administration. From 2008 to 2015, Mr. Miller served as chief financial officer of Cepheid, a high-growth molecular diagnostics company. While at Cepheid, he built world-class finance and information technology teams and a nationally recognized investor relations program. Mr. Miller has also served in financial leadership roles at Autodesk, MarketFirst Software, Cadence Design Systems, and Silicon Graphics. He is a former director of United Online. Mr. Miller brings to our Board of Directors his extensive experience in financial leadership roles, significant experience in investor relations and background in software and information technology.

Christopher J. Klein has served as a member of the Board of Thor Industries since December 2017 and is a member of its Nominating and Compensation and Developments Committees. Mr. Klein is the Executive Chairman of the Board of Fortune Brands Home & Security, Inc., a leading manufacturer of home and security products, having retired as CEO in January 2020. He joined Fortune Brands, Inc. in 2003 and held corporate strategy, business development and operational positions, and served in the role of CEO of Fortune Brands Home & Security from 2010 to January 2020, taking the company public in a spin-off in 2011. Prior to joining Fortune Brands, Inc., Mr. Klein held key strategy and operating positions at Bank One Corporation. Previously, he was a partner at McKinsey & Company, a global management consulting firm where he spent eight years in the firm’s Chicago office. Mr. Klein spent his early career in commercial banking, at both ABN / AMRO and First Chicago. Mr. Klein brings to our Board extensive public company and operational leadership experience, including management experience as chief executive officer of a public company as well as significant corporate strategy experience.

Composition of Board

Our Board consists of six members. Our amended and restated certificate of incorporation provides that our Board is divided into three classes, denominated as class I, class II and class III. Members of each class hold office for staggered three-year terms. The class I directors, whose terms will expire at the first annual meeting of our stockholders following the completion of the distribution, are Ms. Francis and Mr. Morelli. The class II directors, whose terms will expire at the second annual meeting of our stockholders following the completion of the distribution, are Messrs. Gafinowitz and Miller. The class III directors, whose terms will expire at the third annual meeting of our stockholders following the completion of the distribution, are Ms. Boyland and Mr. Klein.

Majority Voting Standard

Our amended and restated bylaws provide for majority voting in uncontested director elections, and the Board adopted a director resignation policy. Under the policy, our Board will not appoint or nominate for election to the Board any person who does not agree to tender an irrevocable resignation effective in such circumstances where the individual does not receive a majority of the votes cast in an uncontested election and such resignation is accepted by the Board. If an incumbent director is not elected by a majority of the votes cast in an uncontested election, our Nominating and Governance Committee will submit for prompt consideration by the Board a recommendation whether to accept or reject the director’s resignation. The Board would expect the director whose resignation is under consideration to abstain from participating in any decision regarding that resignation.

 

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At any meeting of stockholders for which the number of nominees for director standing for election at such meeting exceeds the number of directors to be elected at such meeting, the directors will be elected by a plurality of the votes cast. This means that the nominees who receive the most affirmative votes will be elected to serve as directors. In the event that a director nominee fails to receive a majority of the votes cast in an election where the number of nominees is less than or equal to the number of directors to be elected, the Board, within its powers, may take any appropriate action, including decreasing the number of directors or filling a vacancy.

Director Independence

The Board has determined that Mses. Francis and Boyland and Messrs. Miller and Klein are independent directors under the applicable rules of the NYSE.

In evaluating the independence of Ms. Francis, the Board considered the consulting agreement between Ms. Francis and Fortive, dated as of August 7, 2020, with respect to services related to the search and screening process for future members of the Board and Ms. Francis’ recommendations to Fortive management with respect thereto. The consulting agreement provided for a payment of $100,000 to Ms. Francis for such services and was terminated prior to her appointment to the Board.

The Board will assess on a regular basis, and at least annually, the independence of directors and, based on the recommendation of the Nominating and Governance Committee, will make a determination as to which members are independent.

Committees of the Board of Directors

Audit Committee. The members of the Audit Committee are Mr. Miller and Mses. Francis and Boyland. Mr. Miller serves as chair of the Audit Committee. The Board has determined that Mr. Miller is an “audit committee financial expert” for purposes of the rules of the SEC. In addition, the Board has determined that Mr. Miller and Mses. Francis and Boyland are independent, as defined by the rules of the NYSE and Section 10A(m)(3) of the Exchange Act. Rule 10A-3 of the Exchange Act and the NYSE rules require that our Audit Committee have at least one independent member upon the listing of our common stock, have a majority of independent members within 90 days of the date of our initial listing and be composed entirely of independent members within one year of the date of our initial listing. The Audit Committee typically meets in executive session, without the presence of management, at each regularly scheduled meeting, and reports to the Board on its actions and recommendations at each regularly scheduled Board meeting. The Audit Committee will meet at least quarterly and will assist the Board in:

 

   

assessing the qualifications and independence of our independent auditors;

 

   

appointing, compensating, retaining, and evaluating our independent auditors;

 

   

overseeing the quality and integrity of our financial statements and making a recommendation to the Board regarding the inclusion of the audited financial statements in our Annual Report on Form 10-K;

 

   

overseeing our internal auditing processes;

 

   

overseeing management’s assessment of the effectiveness of our internal control over financial reporting;

 

   

overseeing management’s assessment of the effectiveness of our disclosure controls and procedures;

 

   

overseeing risks related to financial controls, legal and compliance risks and major financial, privacy, security and business continuity risks;

 

   

overseeing our risk assessment and risk management policies;

 

   

overseeing our compliance with legal and regulatory requirements;

 

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overseeing our cybersecurity risk management and risk controls; and

 

   

overseeing swap and derivative transactions and related policies and procedures

Compensation and Management Development Committee. The members of the Compensation and Management Development Committee are Ms. Francis, Mr. Miller and Mr. Klein. Ms. Francis serves as the Chair of the Compensation and Management Development Committee. The Board has determined that Ms. Francis, Mr. Miller and Mr. Klein are independent, as defined by the rules of the NYSE and Section 10C(a) of the Exchange Act. In addition, we expect that Ms. Francis, Mr. Miller and Mr. Klein will qualify as “non-employee directors” for purposes of Rule 16b-3 under the Exchange Act. The Compensation and Management Development Committee will discharge the Board’s responsibilities relating to the compensation of our executive officers, including setting goals and objectives for, evaluating the performance of, and approving the compensation paid to, our executive officers. The Compensation and Management Development Committee is also responsible for:

 

   

determining and approving the form and amount of annual compensation of the CEO and our other executive officers, including evaluating the performance of, and approving the compensation paid to, our CEO and other executive officers;

 

   

reviewing and making recommendations to the Board with respect to the adoption, amendment and termination of all executive incentive compensation plans and all equity compensation plans, and exercising all authority with respect to the administration of such plans;

 

   

reviewing and making recommendations to the Board with respect to the form and amounts of director compensation;

 

   

overseeing and monitoring compliance by directors and executive officers with our stock ownership requirements;

 

   

overseeing risks associated with our compensation policies and practices; and

 

   

overseeing our engagement with stockholders and proxy advisory firms regarding executive compensation matters.

Nominating and Governance Committee. The members of the Nominating and Governance Committee are Ms. Boyland, Mr. Gafinowitz and Mr. Klein. Ms. Boyland serves as the Chair of the Nominating and Governance Committee. The Board has determined that Ms. Boyland is independent, as defined by the rules of the NYSE. The Nominating and Governance Committee is responsible for:

 

   

reviewing and making recommendations to the Board regarding the size and composition of the Board;

 

   

assisting the Board in identifying individuals qualified to become Board members;

 

   

assisting the Board in identifying characteristics, skills, and experiences for the Board with the objective of having a Board with diverse backgrounds, experiences, skills, and perspectives;

 

   

proposing to the Board the director nominees for election by our stockholders at each annual meeting;

 

   

assisting the Board in determining the independence and qualifications of the Board and Committee members and making recommendations to the Board regarding committee membership;

 

   

developing and making recommendations to the Board regarding a set of corporate governance guidelines and reviewing such guidelines on an annual basis;

 

   

overseeing compliance with the corporate governance guidelines;

 

   

overseeing our environmental, social and governance reporting;

 

   

assisting the Board and the Committees in engaging in annual self-assessment of their performance;

 

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oversee the orientation process for newly elected members of the Board and continuing director education; and

 

   

administering our Related Person Transactions Policy.

The Board has adopted a written charter for each of the Audit Committee, the Compensation and Management Development Committee and the Nominating and Governance Committee. These charters are posted on our website.

Compensation and Management Development Committee Interlocks and Insider Participation

During our fiscal year ended December 31, 2019, we were not a separate or independent company and did not have a Compensation and Management Development Committee or any other committee serving a similar function. Decisions as to the compensation for that fiscal year of those who serve as our executive officers were made by Fortive, as described in the section of this prospectus captioned “Executive and Director Compensation.”

Corporate Governance

Stockholder Recommendations for Director Nominees

Our amended and restated bylaws contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the Board. We expect that the Board will adopt a policy concerning the evaluation of stockholder recommendations of Board candidates by the Nominating and Governance Committee.

Corporate Governance Guidelines

The Board adopted a set of Corporate Governance Guidelines in connection with the separation to assist it in guiding our governance practices. These practices will be regularly reevaluated by the Nominating and Governance Committee in light of changing circumstances in order to continue serving our best interests and the best interests of our stockholders. These guidelines cover a number of areas, including the role of the Board of Directors, Board composition, director independence, director selection, qualification and election, director compensation, executive sessions, key Board responsibilities, CEO evaluation, succession planning, Board leadership and operations, annual Board assessments, Board committees, director orientation and continuing education, Board agenda, materials, information and presentations, director access to management and independent advisers, and Board communication with stockholders and others. A copy of our corporate governance guidelines is posted on our website.

Director Qualification Standards

Our Corporate Governance Guidelines provide that the Nominating and Governance Committee is responsible for reviewing with the Board the appropriate skills and characteristics required of board members in the context of the makeup of the Board and developing criteria for identifying and evaluating board candidates. We believe that it is important that our directors demonstrate:

 

   

personal and professional integrity and character;

 

   

prominence and reputation in his or her profession;

 

   

skills, knowledge and expertise (including business or other relevant experience) that in aggregate are useful and appropriate in overseeing and providing strategic direction with respect to our business and serving the long-term interests of our stockholders;

 

   

the capacity and desire to represent the interests of the stockholders as a whole; and

 

   

availability to devote sufficient time to the affairs of Vontier.

 

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The Nominating and Governance Committee is responsible for recommending to the Board a slate of nominees for election at each annual meeting of stockholders. Nominees may be suggested by directors, members of management, stockholders or, in some cases, by a third-party search firm. The Nominating and Governance Committee will consider a wide range of factors when assessing potential director nominees. This includes consideration of the current composition of the Board, any perceived need for one or more particular areas of expertise, the balance of management and independent directors, the need for committee-specific expertise, the evaluations of other prospective nominees and the qualifications of each potential nominee relative to the attributes, skills and experience described above. The Board does not expect to have a formal or informal policy with respect to diversity but believes that the Board, taken as a whole, should embody a diverse set of skills, knowledge, experiences and backgrounds appropriate in light of our needs, and in this regard expects to subjectively take into consideration the diversity (with respect to race, gender and national origin) of the Board when considering director nominees. The Board does not expect to make any particular weighting of diversity or any other characteristic in evaluating nominees and directors.

A stockholder who wishes to recommend a prospective nominee for the Board should notify the Secretary in writing using the procedures described under “—Corporate Governance—Stockholder Recommendations for Director Nominees” with whatever supporting material the stockholder considers appropriate. If a prospective nominee has been identified other than in connection with a director search process initiated by the Committee, the Committee will make an initial determination as to whether to conduct a full evaluation of the candidate. The Committee’s determination of whether to conduct a full evaluation will be based primarily on the Committee’s view as to whether a new or additional Board member is necessary or appropriate at such time, the likelihood that the prospective nominee can satisfy the evaluation factors described above and any other factors as the Committee may deem appropriate. The Committee will take into account whatever information is provided to the Committee with the recommendation of the prospective candidate and any additional inquiries the Committee may in its discretion conduct or have conducted with respect to such prospective nominee.

Board’s Role in Risk Oversight

Our management has day-to-day responsibility for assessing and managing our risk exposure and the Board and its committees oversee those efforts, with particular emphasis on the most significant risks facing us. Each committee will report to the full Board on a regular basis, including as appropriate with respect to the committee’s risk oversight activities.

 

BOARD/COMMITTEE

 

PRIMARY AREAS OF RISK OVERSIGHT

Full Board

  Risks associated with our strategic plan, acquisition and capital allocation program, capital structure, liquidity, organizational structure and other significant risks, and overall risk assessment and risk management policies.

Audit Committee

  Risks related to financial controls, legal and compliance risks and major financial, privacy, security and business continuity risks, cybersecurity risk management and risk controls.

Compensation and Management Development Committee

  Risks associated with compensation policies and practices.

Nominating and Governance Committee

  Risks related to corporate governance and board management.

Policies on Business Ethics

In connection with the separation, we adopted a Code of Conduct that requires all of our business activities to be conducted in compliance with applicable laws and regulations and ethical principles and values. All of our directors, officers and employees are required to read, understand and abide by the requirements of the Code of Conduct.

 

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Our Code of Conduct is accessible on our website. Any waiver of the Code of Conduct for directors or executive officers may be made only by the Board or a committee of the Board. We will disclose any amendment to, or waiver from, a provision of the Code of Conduct for the principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our website within four business days following the date of the amendment or waiver. In addition, we will disclose any waiver from the Code of Conduct for the other executive officers and for directors on the website. Our website, and the information contained therein, or connected thereto, is not incorporated by reference into this prospectus.

Procedures for Treatment of Complaints Regarding Accounting, Internal Accounting Controls and Auditing Matters

In accordance with the Sarbanes-Oxley Act of 2002, our Audit Committee has adopted procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls and auditing matters and to allow for the confidential, anonymous submission by employees and others of concerns regarding questionable accounting or auditing matters.

Website Disclosure

We may provide disclosure in the “Investors—Governance” section of our corporate website, www.vontier.com, of any of the following: (1) the identity of the presiding director at meetings of non-management or independent directors, or the method of selecting the presiding director if such director changes from meeting to meeting; (2) the method for interested parties to communicate directly with the Board or with individual directors or the non-management or independent directors as a group; (3) the identity of any member of our Audit Committee who also serves on the audit committees of more than three public companies and a determination by the Board that such simultaneous service will not impair the ability of such member to effectively serve on our Audit Committee; and (4) contributions by the Company to a tax exempt organization in which any non-management or independent director serves as an executive officer if, within the preceding three years, contributions in any single fiscal year exceeded the greater or $1 million or 2% of such tax exempt organization’s consolidated gross revenues. We also intend to disclose any amendment to the Code of Conduct that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S-K, and any waiver from a provision of the Code of Conduct granted to any of our directors, principal executive officer, principal financial officer, principal accounting officer, or any other executive officer, in the “Investors—Governance” section of our corporate website, www.vontier.com, within four business days following the date of such amendment or waiver.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

Compensation Discussion and Analysis

For purposes of this prospectus, our executive officers whose compensation is discussed in this Compensation Discussion and Analysis and whom we refer to as our named executive officers, or “NEOs,” are:

 

   

Mark D. Morelli, President and Chief Executive Officer

 

   

David H. Naemura, Senior Vice President, Chief Financial Officer and Treasurer

 

   

Kathryn K. Rowen, Senior Vice President and General Counsel

 

   

Andrew Nash, Senior Vice President, Human Resources

 

   

Michael D. Beverly, former Senior Vice President and General Counsel

Mr. Morelli commenced employment with us on January 13, 2020, and Mr. Naemura commenced employment with us on February 3, 2020. Mr. Beverly has been an employee of Fortive (or its predecessors) since 2010, assumed his role with us on October 1, 2019 and retired on September 1, 2020. Mr. Nash has been an employee of Fortive (or its predecessors) since 2009 and assumed his role with us on January 2, 2020. Ms. Rowen has been an employee of Fortive since 2017 and assumed her role with us on September 1, 2020.

Immediately prior to the distribution, we were a wholly-owned subsidiary of Fortive. As a result, this Compensation Discussion and Analysis discusses Fortive’s 2019 compensation programs, subject to the letter agreements with our NEOs. Following the distribution, our Board of Directors has formed its own Compensation and Management Development Committee and it has chosen to implement different compensation programs for our executive officers, subject to their letter agreements.

Compensation Philosophy

Fortive’s compensation philosophy is aligned with building long-term stockholder value, with its executive compensation program designed to:

 

ATTRACT, RECRUIT & RETAIN

   Recruit, retain and motivate talented, high-quality leaders with a passion for creativity, innovation, continuous improvement and customer experience

BE COMPETITIVE

   Deliver a total pay opportunity that is competitive in the market

ALIGN WITH BUSINESS STRATEGY

   Focus its incentive compensation programs on performance that leads to sustained stockholder value creation, consistent with its business strategy

PAY FOR PERFORMANCE

   With a culture of high expectations, set, achieve and reward both short-term and long-term performance

ALIGN WITH STOCKHOLDERS

   Place a strong emphasis on long-term, equity-based compensation to align interests of its executive officers with those of its stockholders

Elements of Executive Compensation

Consistent with its executive compensation philosophy, Fortive adopted a program in 2019 that emphasizes equity-based compensation with long-term vesting requirements and is dependent on long-term company performance.

 

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Fortive believes that, while fixed compensation is important to provide a stable source of income, executive compensation should primarily be variable and at-risk, with a bias toward long-term incentive compensation in the form of equity awards. The following table sets forth the four elements of Fortive’s compensation program:

 

Element

 

Form of

Compensation

 

Primary Objectives

 

Compensation

Philosophy

Base Salary

  Cash  

•   Help attract and retain executive talent.

•   Provide stable source of income.

•   Recognize day-to-day role and scope of responsibility.

 

•   Attract, Recruit & Retain

•   Competitive

Annual Incentive Compensation   Cash  

•   Align compensation with business strategy.

•   Reward annual performance on key operational and financial measures.

•   Motivate and reward high individual performance.

 

•   Attract, Recruit & Retain

•   Competitive

•   Alignment with Business Strategy

•   Pay for Performance

Long-Term Incentive Compensation   Stock Options

RSUs

 

•   Drive sustainable performance that delivers long-term value to stockholders.

•   Help retain executive talent through extended vesting schedules.

•   Align the interest of the executive with those of the stockholders.

 

•   Attract, Recruit & Retain

•   Competitive

•   Alignment with Business Strategy

•   Alignment with Stockholders

Other Compensation

 

Employee Benefit Plans

Perquisites

Severance Benefits

 

•   Provide competitive compensation at an actual cost to Fortive lower than the perceived value to the executives.

 

•   Attract, Recruit & Retain

•   Competitive

In establishing the compensation for our executive officers, we have utilized broad-based compensation surveys to assess market compensation. We expect in the future to identify a peer group and consider peer group pay, alongside our pay for performance and long-term value creation objectives, in determining the compensation for our executive officers that best aligns compensation and stockholder interests.

Executive Officer Letter Agreements

Letter Agreement with Mr. Morelli

GTHM Employment Services, LLC (“GTHM”), a subsidiary of Fortive that became part of the Company in connection with the distribution, entered into a letter agreement with Mr. Morelli on November 29, 2019 providing that as of the completion of the distribution, Mr. Morelli serves as our President and Chief Executive

 

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Officer. Prior thereto, Mr. Morelli provided services to us in furtherance of the completion of the distribution and reported to the President and Chief Executive Officer of Fortive. Pursuant to the letter agreement, Mr. Morelli’s employment is on an at-will basis and he is entitled to an annual base salary of $1,000,000 and an annual incentive target bonus of 150% of his annual base salary. In addition, Mr. Morelli received a signing cash bonus equal to $3,000,000.

Pursuant to the letter agreement, Mr. Morelli received the following Fortive equity awards in February 2020: (i) a one-time sign-on equity award with a target grant date fair value of $6,000,000, with one-third delivered in stock options and two-thirds delivered in restricted stock units, each of which vest ratably over the first three anniversaries of the date of grant, (ii) an additional special one-time equity award with a target grant date fair value of $2,000,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant, and (iii) an annual equity award with a target grant date fair value of $4,000,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant. In each case, vesting is generally subject to Mr. Morelli’s continued employment on each vesting date.

Such Fortive equity awards converted into Vontier equity awards in a manner that is designed to substantially preserve the value of the award at the time of the conversion. See “Treatment of Outstanding Fortive Equity Awards.”

Mr. Morelli participated in Fortive’s deferred compensation program and in the employee benefit plans that are maintained for Fortive’s regular employees generally, and received an annual cash stipend of $10,000 for financial services and counseling and relocation benefits under Fortive’s relocation policy. Vontier has adopted its own deferred compensation program in which Mr. Morelli is eligible to participate, as more fully described below.

In addition, Mr. Morelli is eligible to participate in Vontier’s Severance and Change-in-Control Plan for Officers, and prior to the separation, was entitled to the same level of benefits provided to the President and CEO of Fortive under Fortive’s Severance and Change-in-Control Plan for Officers, in each case as more fully described below.

Letter Agreement with Mr. Naemura

GTHM entered into a letter agreement with Mr. Naemura on December 5, 2019 providing that as of the completion of the distribution, Mr. Naemura serves as our Chief Financial Officer. Prior thereto, Mr. Naemura provided services to us in furtherance of the completion of the separation and distribution and reports to Mr. Morelli. Pursuant to the letter agreement, Mr. Naemura’s employment is on an at-will basis and he is entitled to an annual base salary of $630,000 and an annual incentive target bonus of 125% of his annual base salary. In addition, Mr. Naemura received a signing cash bonus equal to $1,100,000.

Pursuant to the letter agreement, Mr. Naemura received the following Fortive equity awards in February 2020: (i) a one-time sign-on equity award with a target grant date fair value of $5,000,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first three anniversaries of the date of grant, (ii) an additional special one-time equity award with a target grant date fair value of $1,000,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant, and (iii) an annual equity award with a target grant date fair value of $1,750,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant. In each case, vesting is generally subject to Mr. Naemura’s continued employment on each vesting date.

Such Fortive equity awards converted into Vontier equity awards in a manner that is designed to substantially preserve the value of the award at the time of the conversion.

 

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Mr. Naemura participated in Fortive’s deferred compensation program and in the employee benefit plans that are maintained for Fortive’s regular employees generally, and received an annual cash stipend of $10,000 for financial services and counseling and relocation benefits under Fortive’s relocation policy. Vontier has adopted its own deferred compensation program in which Mr. Naemura is eligible to participate, as more fully described below.

Letter Agreement with Mr. Beverly

GTHM entered into a letter agreement with Mr. Beverly on September 16, 2019 providing that effective as of October 1, 2019, Mr. Beverly served as our Senior Vice President and General Counsel until his retirement on September 1, 2020. Pursuant to the letter agreement, Mr. Beverly’s employment was on an at-will basis and he was entitled to an annual base salary of $450,000 and an annual incentive target bonus of 60% of his annual base salary.

Pursuant to the letter agreement, Mr. Beverly received the following Fortive equity awards in February 2020: (i) a one-time sign-on equity award with a target grant date fair value of $400,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant and (ii) an annual equity award with a target grant date fair value of $600,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant. In each case, vesting is generally subject to Mr. Beverly’s continued employment on each vesting date.

Prior to his retirement, Mr. Beverly participated in Fortive’s deferred compensation program and in the employee benefit plans that are maintained for Fortive’s regular employees generally.

Letter Agreement with Ms. Rowen

Vontier Employment Services LLC entered into a letter agreement with Ms. Rowen on June 17, 2020 providing that effective as of September 1, 2020, Ms. Rowen would serve as our Senior Vice President and General Counsel. Pursuant to the letter agreement, Ms. Rowen’s employment is on an at-will basis and she is entitled to an annual base salary of $450,000 and an annual incentive target bonus of 60% of her annual base salary.

Pursuant to the letter agreement, Ms. Rowen received a one-time sign-on equity award with a target grant date fair value of $400,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant. Ms. Rowen will receive an annual equity award with a 2021 target grant date fair value of $600,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant. In each case, vesting is generally subject to Ms. Rowen’s continued employment on each vesting date.

Such Fortive equity awards converted into Vontier equity awards in a manner designed to substantially preserve the value of the award at the time of the conversion.

Ms. Rowen participated in Fortive’s deferred compensation program and in the employee benefit plans that are maintained for Fortive’s regular employees generally, and received an annual cash stipend of $10,000 for financial services and counseling and relocation benefits under Fortive’s relocation policy. Vontier has adopted its own deferred compensation program in which Ms. Rowen is eligible to participate, as more fully described below.

Letter Agreement with Mr. Nash

GTHM entered into a letter agreement with Mr. Nash on December 13, 2019 providing that effective as of January 2, 2020, Mr. Nash would serve as our Senior Vice President, Human Resources. Pursuant to the letter agreement, Mr. Nash’s employment is on an at-will basis and he is entitled to an annual base salary of $450,000 and an annual incentive target bonus of 60% of his annual base salary.

 

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Pursuant to the letter agreement, Mr. Nash received the following Fortive equity awards in February 2020: (i) a one-time sign-on equity award with a target grant date fair value of $400,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant and (ii) an annual equity award with a target grant date fair value of $450,000, split evenly between stock options and restricted stock units, each of which vest ratably over the first five anniversaries of the date of grant. In each case, vesting is generally subject to Mr. Nash’s continued employment on each vesting date.

Fortive equity awards converted into Vontier equity awards in a manner designed to substantially preserve the value of the award at the time of the conversion.

Mr. Nash participated in Fortive’s deferred compensation program and in the employee benefit plans that are maintained for Fortive’s regular employees generally, and received an annual cash stipend of $10,000 for financial services and counseling and relocation benefits under Fortive’s relocation policy. Vontier has adopted its own deferred compensation program in which Mr. Nash is eligible to participate, as more fully described below.

Voluntary Salary Reduction

As part of the cost reduction efforts implemented in response to the COVID-19 pandemic, the executive officers of Vontier reduced their respective base salaries on a voluntary and temporary basis, with the reduction for Mr. Morelli implemented at 30% on a prorated basis and at 15% on a prorated basis for all other executive officers. The temporary reduction was terminated at the time of the separation.

Annual Incentive Awards

In order to align our executive compensation program with our business strategy, reward annual performance by our executive officers based on the achievement of key operational and financial measures, and motivate and reward high individual performance, we adopted the Vontier Corporation 2020 Executive Incentive Compensation Plan, pursuant to which we will provide annual cash bonuses to participants based on the achievement of annual performance measures relating to our business and the participant’s personal performance.

Other Compensation

Severance Benefits

Severance and Change-in-Control Plan for Officers

Prior to the distribution, Mr. Morelli was entitled to receive the same level of benefits provided to Fortive’s President and CEO under Fortive’s Severance and Change-in-Control Plan for Officers, which we refer to as the Fortive Severance Plan. The Fortive Severance Plan provides for severance benefits upon (i) a termination without cause (as defined in the Fortive Severance Plan) not preceded by a change-in-control of Fortive and (ii) a termination without cause, or good reason resignation (as defined in the Fortive Severance Plan), within 24 months following a qualified change-in-control of Fortive. The level of benefits provided under the Fortive Severance Plan depends on the participant’s job title, as more fully described below.

“Double-Trigger” Change-in-Control Severance. Because Fortive intends for the change-in-control severance benefit to ensure that eligible participants pursue transactions in the best interest of Fortive’s stockholders, the definition of “change-in-control” under the Fortive Severance Plan includes only:

 

   

a merger, consolidation or reorganization in which Fortive is not the surviving entity and in which the voting securities of Fortive prior to such transaction would represent 50% or less of the voting securities of the surviving entity;

 

   

a sale of all or substantially all of the assets of Fortive; or

 

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any transaction approved by the Board of Directors of Fortive that results in any person or entity that is not an affiliate of Fortive owning 100% of Fortive’s outstanding voting securities.

If, within 24 months following a qualified change-in-control of Fortive, an eligible participant is terminated without cause, or resigns for good reason, then the following severance payment would be due:

 

COMPENSATION

  

PRESIDENT AND CEO

  

OTHER NEOS

Cash Severance Payment

   2 times base salary and target annual incentive award    1 times base salary and target annual incentive award

Prorated Cash Annual Incentive Award

   Target annual incentive award prorated for the period from the beginning of the year to the date of termination    Same as President and CEO

Equity Awards

   Immediate acceleration of all unvested outstanding equity awards    Same as President and CEO

Health Benefits

   24 months    12 months

280G Excise Tax

   No tax gross up    No tax gross up

Termination without Cause Severance. Recognizing the increased risk of forfeiture for the equity awards held by eligible participants which vest over an extended period of time, and to ensure that eligible participants remain focused on Fortive’s business during periods of uncertainty, Fortive provides the following severance benefits under the Fortive Severance Plan upon a termination without cause (outside the context of a change-in-control):

 

COMPENSATION

  

PRESIDENT AND CEO

  

OTHER NEOS

Cash Severance Payment

   2 times base salary    1 times base salary

Prorated Cash Annual Incentive Award

   Payment based on actual performance against performance targets and prorated for the period from the beginning of the year to the date of termination.    Same as President and CEO

Prorated Equity Awards

  

•   Based on actual performance against performance targets (if any);

•   Subject to original time-vesting; and

•   Prorated for the period from the date of grant to the date of termination.

   Same as President and CEO

Health Benefits

   24 months    12 months

In order to ensure that our executive officers remain focused on our business during any periods of uncertainty and are motivated to pursue transactions in the best interest of our stockholders, we adopted a Severance and Change-in-Control Plan for Officers which may provide benefits to eligible participants that are similar to the benefits provided under the Fortive Severance Plan. All of our executive officers, including Mr. Morelli, are eligible to participate in the plan. Mr. Morelli will no longer participate in the Fortive Severance Plan following the separation.

 

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Senior Leaders Severance Pay Plan

Prior to the separation, our executive officers other than Mr. Morelli participated in Fortive’s Senior Leaders Severance Pay Plan, which we refer to as the Fortive Severance Pay Plan. Under the Fortive Severance Pay Plan, if an eligible participant is terminated due to (i) a reduction in the employer’s workforce or a plant closing, (ii) the elimination of his or her job or position, (iii) a termination of employment in connection with a sale or divestiture of the employer or any division, business unit, plan or office location of the employer or (iv) a determination in the employer’s sole judgment that he or she is unsuited for his or her position, and/or his or her performance, though well-intentioned, does not meet the employer’s standards, all of which we refer to collectively as a “termination without cause,” then, subject to his or her execution of Fortive’s standard form of release, he or she is entitled to severance equal to a minimum of three months of annual base salary plus an additional month for each year of service (provided that the three months plus all additional months may not exceed twelve months in the aggregate), which severance amount shall be paid out over the applicable severance period. In addition, the eligible participant will have the opportunity to continue coverage under specified welfare benefit plans of Fortive for the duration of the severance period at the same cost as an active employee in a position similar to that held by the eligible participant at the time of termination.

In order to ensure that our senior management members remain focused on our business during any periods of uncertainty, we adopted a Senior Leaders Severance Pay Plan which provides benefits to eligible participants that are similar to the benefits provided under the Fortive Severance Pay Plan.

Other Benefits

Our NEOs are eligible to participate in broad-based employee benefit plans which are generally available to all of our U.S. salaried employees and do not discriminate in favor of our NEOs. In addition, each of our NEOs is eligible to participate in the Vontier Corporation Executive Deferred Incentive Plan (the “Vontier EDIP”) from and after the separation date. The Vontier EDIP is a non-qualified, unfunded deferred compensation program that is available to selected members of our management. We will use the Vontier EDIP to tax-effectively contribute amounts to our executives’ retirement accounts and give our executives an opportunity to defer taxes on cash compensation and realize tax-deferred, market-based notional investment growth on their deferrals. Participants in the Vontier EDIP will not fully vest in such amounts until they have participated in the program for 15 years or have reached age 55 with at least five years of service (including, for executives who were employed by Fortive prior to the distribution, years of service with Fortive prior to the distribution).

Prior to the separation, our NEOs were eligible to participate in the Fortive Executiv