Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

Separation from Fortive

Prior to the Separation, the Company’s operating results were included in Fortive’s various consolidated U.S. federal and certain state income tax returns, as well as certain non-U.S. returns. For periods prior to the Separation, the combined financial statements reflect income tax expense and deferred tax balances as if tax returns were filed on a standalone basis separate from Fortive. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if the Company was a separate taxpayer and a standalone enterprise for the periods prior to the Separation.

In connection with the Separation, the Company entered into agreements with Fortive, including a Tax Matters Agreement. The Tax Matters Agreement distinguishes between the treatment of tax matters for “joint” filings compared to “separate” filings prior to the Separation. “Joint” filings are returns, such as the United States federal return, that include operations from both Fortive legal entities and the Company. By contrast, “separate” filings are tax returns (primarily U.S. state returns and non-U.S. returns), that exclusively include either Fortive’s or the Company’s operations, respectively. In accordance with the Tax Matters Agreement, the Company is liable for and has indemnified Fortive against all income tax liabilities involving “separate” filings for periods prior to the Separation.

Earnings and Income Taxes

Earnings (losses) before income taxes for the years ended December 31 were as follows:

($ in millions)	2022		2021		2020
United States	$	552.4	$	506.8	$	496.8
Non-U.S.	(25.0)		27.2		(36.5)
Total	$	527.4	$	534.0	$	460.3

The provision (benefit) for income taxes for the years ended December 31 were as follows:

($ in millions)	2022		2021		2020
Current:
Federal U.S.	$	127.1	$	122.2	$	122.9
Non-U.S.	14.4		15.5		19.8
State and local	28.1		29.0		18.4
Deferred:
Federal U.S.	(26.3)		(32.8)		(33.3)
Non-U.S.	(15.5)		(10.2)		(8.4)
State and local	(1.7)		(2.7)		(1.1)
Income tax provision	$	126.1	$	121.0	$	118.3

Deferred Tax Assets and Liabilities

All deferred tax assets and liabilities have been classified as noncurrent and are included in Other assets and Other long-term liabilities in the accompanying Consolidated Balance Sheets. Deferred income tax assets and liabilities as of December 31 were as follows:

($ in millions)	2022		2021
Deferred tax assets:
Allowance for credit losses	$	23.7	$	26.2
Operating lease liabilities	11.7		12.0
Inventories	15.8		8.6
Pension benefits	1.7		1.6
Other accruals and prepayments	42.6		31.5
Deferred revenue	16.0		15.3
Warranty services	9.5		10.8
Stock-based compensation expense	6.8		7.4
Tax credit and loss carryforwards	50.8		39.0
Other	5.0		2.5
Valuation allowances	(26.8)		(23.0)
Total deferred tax assets	156.8		131.9
Deferred tax liabilities:
Property, plant and equipment	(4.5)		(8.5)
Operating lease right-of-use assets	(10.4)		(11.1)
Insurance, including self-insurance	(6.5)		(16.0)
Goodwill and other intangibles	(105.4)		(107.3)
Other	(3.3)		(5.8)
Total deferred tax liabilities	(130.1)		(148.7)
Net deferred tax asset (liability)	$	26.7	$	(16.8)

Applying the valuation allowance methodology discussed in Note 2. Basis of Presentation and Summary of Significant Accounting Policies, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period. The Company’s valuation allowance increased by $3.8 million during the

current year.

As of December 31, 2022, the Company has federal, various state, and foreign net operating losses in the amounts of $1.6 million, $45.4 million, and $220.8 million, respectively. These net operating loss carryforwards have various expiration periods beginning in 2022, including some with no expiration.

Effective Income Tax Rate

The effective income tax rate for the years ended December 31 varies from the U.S. statutory federal income tax rate as follows:

	Percentage of Pretax Earnings
	2022		2021		2020
Statutory federal income tax rate	21.0	%	21.0	%	21.0	%
Increase (decrease) in tax rate resulting from:
State income taxes (net of federal income tax benefit)	4.0	%	3.9	%	3.1	%
Non-U.S. income taxed at different rate than U.S. statutory rate	0.7	%	0.7	%	4.0	%
Foreign derived intangible income taxation	(1.4)	%	(1.5)	%	(1.6)	%
Nontaxable income	(0.9)	%	(1.0)	%	(3.3)	%
Uncertain tax positions	0.3	%	0.2	%	1.5	%
Tax credits	(1.3)	%	(1.0)	%	(0.7)	%
Goodwill impairment	—	%	—	%	1.1	%
Other	1.5	%	0.4	%	0.6	%
Effective income tax rate	23.9	%	22.7	%	25.7	%

Our effective tax rate for 2022, 2021, and 2020 differs from the U.S. federal statutory rate of 21.0% due primarily to the effect of state taxes, foreign derived intangible income, and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, there was a favorable impact related to non-taxable income.

We made income tax payments of $167.2 million and $218.3 million during the years ended December 31, 2022 and 2021, respectively, and $4.6 million from the date of the Separation to December 31, 2020. Prior to the Separation, we did not make any income tax payments related to “joint” tax returns as these liabilities were the responsibility of Fortive. Vontier did make income tax payments related to “separate” tax returns for which it was responsible.

Unrecognized Tax Benefits

As of December 31, 2022, gross unrecognized tax benefits were $14.0 million ($15.7 million total, including $2.0 million associated with interest and penalties, and net of the impact of $0.3 million of indirect tax benefits). As of December 31, 2021, gross unrecognized tax benefits were $14.1 million ($15.5 million total, including $1.8 million associated with interest and penalties, and net of the impact of $0.4 million of indirect tax benefits). The Company recognized approximately $1.1 million, $0.3 million, and $0.3 million in potential interest and penalties associated with uncertain tax positions during the years ended December 31, 2022, 2021, and 2020, respectively. To the extent taxes are not assessed with respect to uncertain tax positions, substantially all amounts accrued (including interest and penalties and net of indirect offsets) will be reduced and reflected as a reduction of the overall income tax provision. Unrecognized tax benefits and associated accrued interest and penalties are included in the income tax provision.

A reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding amounts accrued for potential interest and penalties, is as follows as of December 31:

($ in millions)	2022		2021		2020
Unrecognized tax benefits, beginning of year	$	14.1	$	17.4	$	14.5
Additions based on tax positions related to the current year	1.0		2.7		8.5
Additions for tax positions of prior years	1.2		0.2		0.5
Reductions for tax positions of prior years	(1.1)		(2.9)		(0.6)
Lapse of statute of limitations	—		—		(0.3)
Settlements	(0.9)		(2.9)		(2.1)
Effect of foreign currency translation	(0.3)		(0.4)		0.3
Separation-related adjustments	—		—		(3.4)
Unrecognized tax benefits, end of year	$	14.0	$	14.1	$	17.4

The Company is routinely examined by various domestic and international taxing authorities. The amount of income taxes paid is subject to audit by federal, state and foreign tax authorities, which may result in proposed assessments. The Company is subject to examination in the United States, various states and foreign jurisdictions. In accordance with the Tax Matters Agreement with Fortive, the Company is liable for taxes arising from examinations of the following: (i) the Company’s initial U.S. federal taxable year which includes the post-separation period; (ii) separate company state tax returns for all periods; (iii) joint state tax returns for the post-separation period; (iv) international separate company returns for all periods; and (v) joint international tax returns that include only Vontier legal entities for all periods. Global tax positions are reviewed 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. The Company does not believe that the total amount of unrecognized tax benefits will change by a material amount within the next 12 months due to the settlement of audits and expirations of statutes of limitations.

Pursuant to U.S. tax law, the Company’s initial U.S. federal income tax return for the post-separation period was filed in October 2021. The Company filed its first full year U.S. federal income tax return for 2021 with the Internal Revenue Service (“IRS”) in October 2022. The IRS has not yet begun examination of the Company. The Company remains subject to tax audit for its separate company tax returns in various U.S. states for the tax years 2011 to 2021. Operations in certain foreign jurisdictions remain subject to routine examination for the tax years 2009 to 2021.

Repatriation and Unremitted Earnings

As of December 31, 2022, the Company’s undistributed earnings of its foreign subsidiaries are intended to be permanently reinvested in non-U.S. operations. The operating plans, budgets and forecasts, and long-term and short-term financial requirements of the parent company and the subsidiaries indicate that there is no current or known future need to distribute cash from foreign subsidiaries for any purpose. Therefore, no deferred taxes have been recorded. A determination of the amount of the unrecognized deferred tax liability related to these undistributed earnings is not practicable due to the complexity and variety of assumptions necessary based on the manner in which the undistributed earnings would be repatriated.