Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 644K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 21K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 21K
12: R1 Cover Page HTML 73K
13: R2 Consolidated Condensed Balance Sheets HTML 125K
14: R3 Consolidated Condensed Balance Sheets HTML 44K
(Parenthetical)
15: R4 Consolidated and Combined Condensed Statements of HTML 107K
Earnings (Loss) and Comprehensive Income (Loss)
16: R5 Consolidated and Combined Condensed Statements of HTML 78K
Changes in Stockholders' Equity
17: R6 Consolidated and Combined Condensed Statements of HTML 94K
Cash Flows
18: R7 Business Overview and Basis of Presentation HTML 33K
19: R8 Financing Receivables HTML 150K
20: R9 Goodwill HTML 24K
21: R10 Financing HTML 49K
22: R11 Accumulated Other Comprehensive Income HTML 54K
23: R12 Sales HTML 65K
24: R13 Income Taxes HTML 24K
25: R14 Leases HTML 21K
26: R15 Litigation and Contingencies HTML 33K
27: R16 Fair Value Measurements HTML 37K
28: R17 Related Party Transactions HTML 42K
29: R18 Capitalization and Earnings Per Share HTML 34K
30: R19 Subsequent Events HTML 23K
31: R20 Business Overview and Basis of Presentation HTML 38K
(Policies)
32: R21 Financing Receivables (Tables) HTML 150K
33: R22 Goodwill (Tables) HTML 24K
34: R23 Financing (Tables) HTML 39K
35: R24 Accumulated Other Comprehensive Income (Tables) HTML 53K
36: R25 Sales (Tables) HTML 58K
37: R26 Litigation and Contingencies (Tables) HTML 25K
38: R27 Fair Value Measurements (Tables) HTML 30K
39: R28 Related Party Transactions (Tables) HTML 27K
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41: R30 Business Overview and Basis of Presentation HTML 34K
(Details)
42: R31 Financing Receivables - Narrative (Details) HTML 45K
43: R32 Financing Receivables - Schedule of Financing HTML 46K
Receivables (Details)
44: R33 Financing Receivables - Schedule of Amortized Cost HTML 67K
by Origination Year (Details)
45: R34 Financing Receivables - Schedule of Financing HTML 38K
Receivable Past Due (Details)
46: R35 Financing Receivables - Schedule Of Allowance For HTML 45K
Credit Losses (Details)
47: R36 Financing Receivable - Allowance For Credit Losses HTML 37K
Related To Trade Accounts Receivable (Details)
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49: R38 Goodwill - Narrative (Details) HTML 24K
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51: R40 Financing - Narrative (Details) HTML 111K
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55: R44 Sales - Revenue, Remaining Performance Obligation HTML 21K
(Details)
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Timing (Details)
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62: R51 Fair Value Measurements (Details) HTML 39K
63: R52 Related Party Transactions - Schedule of Related HTML 31K
Party Expenses (Details)
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Registrant’s
telephone number, including area code: (i984) i275-6000
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading symbol
Name of each exchange on which registered
iCommon stock, par value $0.0001 per share
iVNT
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
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
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☐
Emerging growth company
i☐
1
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 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes i☐No ☒
The number of shares of common stock outstanding at April 30, 2021 was i168,797,957.
Accounts
receivable, less allowance for credit losses of $i42.2 million and $i40.5 million as of April 2, 2021 and December
31, 2020, respectively
i386.5
i447.1
Inventories:
Finished
goods
i94.3
i90.3
Work
in process
i25.8
i19.9
Raw
materials
i122.6
i123.5
Total
inventories
i242.7
i233.7
Prepaid expenses and other current assets
i111.7
i120.8
Total
current assets
i1,411.2
i1,182.1
Property,
plant and equipment, net of accumulated depreciation of $i243.2 million and $i240.4
million as of April 2, 2021 and December 31, 2020, respectively
i98.1
i96.8
Operating
lease right-of-use assets
i35.8
i40.1
Long-term
financing receivables, less allowance for credit losses of $i43.2 million and $i44.4 million as of April 2, 2021 and December
31, 2020, respectively
i237.0
i233.5
Other
intangible assets, net
i241.1
i250.5
Goodwill
i1,082.9
i1,092.1
Other
assets
i178.0
i177.9
Total assets
$
i3,284.1
$
i3,073.0
LIABILITIES
AND EQUITY
Current liabilities:
Short-term borrowings
$
i6.9
$
i10.9
Trade
accounts payable
i375.1
i367.4
Current
operating lease liabilities
i11.9
i11.9
Accrued
expenses and other current liabilities
i404.3
i448.1
Total
current liabilities
i798.2
i838.3
Long-term operating lease liabilities
i26.9
i30.5
Long-term
debt
i1,981.8
i1,795.3
Other
long-term liabilities
i209.2
i217.2
Commitments
and Contingencies
i
i
Equity:
Preferred
stock, iino/ par value -- ii15,000,000/
authorized shares; and iiiinone///
issued and outstanding
NOTES TO CONSOLIDATED AND COMBINED CONDENSED FINANCIAL STATEMENTS
(unaudited)
i
NOTE
1. BUSINESS OVERVIEW AND BASIS OF PRESENTATION
Nature of Business
Vontier Corporation (“Vontier,” the “Company,”“we,”“us,” or “our”) is a global industrial technology company that focuses on critical technical equipment, components, software and services for manufacturing, repair, and servicing in the mobility infrastructure industry worldwide. The Company supplies a wide range of mobility technologies and diagnostics and repair technologies solutions spanning advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software-as-service solutions, professional vehicle mechanics’ and technicians’ equipment and traffic priority control systems. The
Company markets its 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.
Vontier operates through ione reportable segment comprised of itwo
operating segments: (i) mobility technologies, which is 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 (“telematics”) and traffic management (“smart city solutions”), and (ii) diagnostics and repair technologies, which manufactures and distributes vehicle repair tools, toolboxes and automotive diagnostic equipment and software and a full line of wheel-service equipment. Given the interrelationships of the products, technologies and customers and the resulting similar long-term economic characteristics, we meet the aggregation criteria and have combined our itwo
operating segments into a single reportable segment. Historically, these businesses had operated as part of Fortive Corporation’s Industrial Technologies reportable segment (the “Vontier Businesses”).
Separation from Fortive Corporation
On October 9, 2020, Fortive Corporation (“Fortive” or “Former Parent”) completed the separation of Fortive’s Industrial Technologies businesses through a pro rata distribution of i80.1%
of the outstanding common stock of Vontier to Fortive’s stockholders (the “Separation”). In January 2021, Fortive sold a total of i33.5 million shares of the Company’s common stock as part of a secondary offering. After the secondary offering, Fortive no longer owned any of the Company’s outstanding common stock.
i
Basis
of Presentation
The accompanying Consolidated and Combined Condensed Financial Statements present our historical financial position, results of operations, changes in equity and cash flows in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The combined financial statements for periods prior to the Separation were derived from Fortive’s consolidated financial statements and accounting records and prepared in accordance with GAAP for the preparation of carved-out combined financial statements. Through the date of the Separation, all revenues and costs as well as assets and liabilities directly associated with Vontier have been included in the combined condensed financial statements. Prior to the Separation, the combined condensed financial statements also included allocations of certain general, administrative, sales and marketing expenses from Fortive’s corporate office
and from other Fortive businesses to the Company and allocations of related assets, liabilities, and the Former Parent’s investment, as applicable. The allocations were 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 the Company been an entity that operated independently of Fortive during the applicable periods. Related-party allocations prior to the Separation, including the method for such allocation, are discussed further in Note 11. Related-Party Transactions.
Following the Separation, the consolidated condensed financial statements include the accounts of Vontier and those of our wholly-owned subsidiaries
and no longer include any allocations from Fortive. Accordingly:
•The Consolidated Condensed Statement of Earnings and Comprehensive Income, Consolidated Condensed Statement of Changes in Equity and Consolidated Condensed Statement of Cash Flows for the three months ended April 2, 2021 consist of our consolidated results. The Combined Condensed Statement of Earnings (Loss) and Comprehensive Income (Loss), Combined Condensed Statement of Changes in Equity and Combined Condensed Statement of Cash Flows for the three months ended March
27, 2020 consist of the combined results of the Vontier Businesses.
/
8
Our Consolidated and Combined Condensed Financial Statements may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what our financial position, results of operations and cash flows may be in the future.
All significant transactions between the Company and Fortive
have been included in the accompanying Consolidated and Combined Condensed Financial Statements for all periods presented. Cash transactions with Fortive prior to the Separation are reflected in the accompanying Consolidated and Combined Condensed Statements of Changes in Stockholders’ Equity as “Net transfers to Former Parent.” Former Parent’s investment, which included Retained earnings (Accumulated deficit) prior to the Separation, represents Fortive’s interest in our recorded net assets prior to the Separation. In addition, the accumulated net effect of intercompany transactions between us and Fortive or Fortive affiliates for periods prior to the Separation are included in Former Parent’s investment.
The Consolidated and Combined Condensed Financial Statements include our accounts and the accounts of our subsidiaries. All
intercompany balances and transactions have been eliminated upon consolidation. The Consolidated and Combined Condensed Financial Statements also reflect the impact of noncontrolling interests. Noncontrolling interests do not have a significant impact on our consolidated and combined results of operations, therefore net earnings and net earnings per share attributable to noncontrolling interests are not presented separately in our Consolidated and Combined Condensed Statements of Earnings (Loss) and Comprehensive Income (Loss). Net earnings attributable to noncontrolling interests have been reflected in selling, general and administrative expenses (“SG&A”) and were insignificant in all periods presented.
Unaudited Interim Financial Information
The interim Consolidated and Combined Condensed Financial Statements include the accounts
of the Company. These Consolidated and Combined Condensed Financial Statements are prepared in conformity with GAAP, and are unaudited. In the opinion of the Company’s management, all adjustments of a normal recurring nature necessary for a fair presentation have been reflected. Certain financial information that is normally included in annual financial statements prepared in accordance with GAAP, but that is not required for interim reporting purposes, has been omitted. The accompanying interim Consolidated and Combined Condensed Financial Statements and the related notes should be read in conjunction with the Company’s Consolidated and Combined Financial Statements and related notes included in the
Company’s 2020 Annual Report on Form 10-K.
i
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021 issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. These ASUs provide temporary optional expedients and exceptions to existing guidance on contract
modifications and hedge accounting to facilitate the market transition from existing reference rates, such as LIBOR which is being phased out beginning at the end of 2021, to alternate reference rates, such as the Secured Overnight Financing Rate (“SOFR”). These standards were effective upon issuance and allowed application to contract changes as early as January 1, 2020. These provisions may impact the Company as contract modifications and other changes occur during the LIBOR transition period. The Company continues to evaluate the optional relief guidance provided
within these ASUs, has reviewed its debt securities and continues to evaluate commercial contracts that may utilize LIBOR as the reference rate. We will continue the assessment and monitor regulatory developments during the LIBOR transition period.
i
NOTE 2. FINANCING RECEIVABLES
The
Company’s financing receivables are comprised of commercial purchase security agreements with the Company’s end customers (“PSAs”) and commercial loans to the Company’s franchisees (“Franchisee Notes”). Financing receivables are generally secured by the underlying tools and equipment financed.
PSAs are installment sales contracts originated between the franchisee and technicians or independent shop owners which enable these customers to purchase tools and equipment on an extended-term payment plan. PSA payment terms are generally up to ifive
years. Upon origination, the Company assumes the PSA by crediting the franchisee’s trade accounts receivable. As a result, originations of PSAs are non-cash transactions. The Company records PSAs at amortized cost.
Franchisee Notes have payment terms of up to i10 years and include financing to fund business startup costs including: (i) installment loans to franchisees used generally to finance
inventory, equipment, and franchise fees; and (ii) lines of credit to finance working capital, including additional purchases of inventory.
/
9
Revenues associated with the Company’s interest income related to financing receivables are recognized to approximate a constant effective yield over the contract term. Accrued interest is included in Accounts receivable less allowance for credit losses and is insignificant as of April
2, 2021 and December 31, 2020.
Product sales to franchisees and the related financing income is included in Cash flows from operating activities in the accompanying Consolidated and Combined Condensed Statements of Cash Flows.
i
The components of financing receivables with payments due in less than twelve months that are recorded in Accounts receivable less allowance for credit losses on the Consolidated Condensed Balance Sheets were as follows:
Net
deferred origination costs were insignificant as of April 2, 2021 and December 31, 2020. As of April 2, 2021 and December 31, 2020, we had a net unamortized discount on our financing receivables of $i17.2 million and $i18.4 million,
respectively.
It is the Company’s general practice to not engage in contract or loan modifications of existing arrangements for troubled debt restructurings. In limited instances, the Company may modify certain impaired receivables with customers in bankruptcy or other legal proceedings, or in the event of significant natural disasters. Restructured financing receivables as of April 2, 2021 and December 31, 2020 were insignificant.
Credit score and distributor tenure are the primary indicators of credit quality for the
Company’s financing receivables. Depending on the contract, payments for financing receivables are due on a monthly or weekly basis. Weekly payments are converted into a monthly equivalent for purposes of calculating delinquency. Delinquencies are assessed at the end of each month following the monthly equivalent due date and are considered delinquent once past due.
i
The amortized cost basis of PSAs and Franchisee Notes by origination
year as of April 2, 2021, is as follows:
($
in millions)
2021
2020
2019
2018
2017
Prior
Total
PSAs
Credit
Score:
Less than 400
$
i6.2
$
i14.4
$
i8.3
$
i3.8
$
i1.6
$
i0.5
$
i34.8
400-599
i8.0
i21.3
i11.5
i6.2
i2.4
i0.9
i50.3
600-799
i16.5
i41.5
i22.1
i11.5
i4.7
i1.7
i98.0
800+
i25.5
i57.3
i29.2
i14.8
i5.0
i1.3
i133.1
Total
PSAs
$
i56.2
$
i134.5
$
i71.1
$
i36.3
$
i13.7
$
i4.4
$
i316.2
Franchisee
Notes
Active distributors
$
i11.6
$
i19.6
$
i15.4
$
i8.5
$
i4.8
$
i6.0
$
i65.9
Separated
distributors
i—
i0.4
i1.6
i1.7
i2.2
i5.1
i11.0
Total
Franchisee Notes
$
i11.6
$
i20.0
$
i17.0
$
i10.2
$
i7.0
$
i11.1
$
i76.9
/
Past
Due
i
PSAs are considered past due when a contractual payment has not been made. If a customer is making payments on its account, interest will continue to accrue. The table below sets forth the aging of the Company’s PSA balances as of:
($
in millions)
30-59 days past due
60-90 days past due
Greater than 90 days past due
Total past due
Total not considered past due
Total
Greater than 90 days past due and accruing interest
Franchisee
Notes are considered past due when payments have not been made for 21 days after the due date. Past due Franchisee Notes (where the franchisee had not yet separated) were insignificant as of April 2, 2021 and December 31, 2020.
Uncollectable Status
PSAs are deemed uncollectable and written off when they are both contractually delinquent and no payment has been received for i180 days.
Franchisee
Notes are deemed uncollectable and written off after a distributor separates and no payments have been received for ione year.
The Company stops accruing interest and other fees associated with financing receivables when (i) a customer is placed in uncollectable status and repossession efforts have begun; (ii) upon receipt of notification of bankruptcy; (iii) upon notification of the death of a customer; or (iv) other instances in which management concludes collectability
is not reasonably assured.
11
Allowance for Credit Losses Related to Financing Receivables
The Company calculates the allowance for credit losses considering several factors, including the aging of its financing receivables, historical credit loss and portfolio delinquency experience and current economic conditions. The Company also evaluates financing receivables with identified exposures, such as customer defaults, bankruptcy or other events that make it unlikely it will recover the amounts owed to it. In calculating such reserves, the
Company evaluates expected cash flows, including estimated proceeds from disposition of collateral, and calculates an estimate of the potential loss and the probability of loss. When a loss is considered probable on an individual financing receivable, a specific reserve is recorded.
i
The following is a rollforward of the PSAs and Franchisee Notes components of the Company’s allowance for credit losses related to financing receivables as of:
The
ending balance as of April 2, 2021 of $i67.0 million is included in the Consolidated Condensed Balance Sheets in Accounts receivable less allowance for credit losses and Long-term financing receivables less allowance for credit losses in the amounts of $i23.8
million and $i43.2 million, respectively. The ending balance as of December 31, 2020 of $i66.8
million is included in the Consolidated Condensed Balance Sheets in Accounts receivable less allowance for credit losses and Long-term financing receivables less allowance for credit losses in the amounts of $i22.4 million and $i44.4
million, respectively.
Allowance for Credit Losses Related to Trade Accounts Receivables
i
The following is a rollforward of the allowance for credit losses related to the Company’s trade accounts receivables (excluding financing receivables) and the Company’s trade accounts receivable
cost basis as of April 2, 2021:
($ in millions)
Cost basis of trade accounts receivable as of April 2, 2021
Allowance for credit losses balance as of April 2, 2021
i18.4
Net
trade accounts receivable balance as of April 2, 2021
$
i297.4
/
12
The
following is a rollforward of the allowance for credit losses related to the Company’s trade accounts receivables (excluding financing receivables) and the Company’s trade accounts receivable cost basis as of December 31, 2020:
Accumulated
impairment charges were $ii85.3/ million
as of April 2, 2021 and December 31, 2020. iNo impairment charges were recorded during the three months ended April 2, 2021.
/
13
i
NOTE
4. FINANCING
i
The Company had the following debt outstanding as of:
On September 29, 2020, we entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks, consisting of a ithree-year, $i800.0 million
senior unsecured delayed draw term loan facility (the “Three-Year Term Loans”), a itwo-year, $i1.0 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 ithree-year, $i750.0 million senior unsecured multi-currency revolving credit facility, including a $i25.0 million
sublimit for swingline loans and a $i75.0 million sublimit for the issuance of letters of credit (the “Revolving Credit Facility” and, together with the Term Loans, the “Credit Facilities”). We incurred $i7.7 million
in debt issuance costs which were paid by Fortive. Due to the repayment of the Term Loans in connection with the issuance of the Notes, as discussed below, $i3.2 million of these debt issuance costs were expensed and reported in the accompanying Consolidated and Combined Condensed Statement of Earnings (Loss) and Comprehensive Income (Loss) within non-operating expenses as a Write-off of deferred financing costs.
In connection with the issuance of the Notes, as discussed below, the Guarantors of the
Notes became Guarantors of the Credit Facilities.
Two-Year Term Loans
On March 10, 2021, in connection with the issuance of the Notes, as discussed below, we repaid, in full, the Two-Year Term Loans.
Three-Year Term Loans
On March 10, 2021, in connection with the issuance of the Notes, we repaid $i400.0 million
of our Three-Year Term Loans.
The Three-Year Term Loans bear interest at a variable rate equal to LIBOR plus a ratings-based margin which was i162.5 basis points as of April 2, 2021. The interest rate on the Three-Year Term Loans outstanding as of April 2, 2021, was i1.73%
per annum. The Three-Year Term Loans mature on October 6, 2023 and we are not obligated to make repayments prior to the maturity date. We are not permitted to re-borrow once the Three-Year Term Loans are repaid and there is no further ability to draw on the facility. There was no material difference between the carrying value and the estimated fair value of the debt outstanding.
Revolving Credit Facility
The $i750.0 million
Revolving Credit Facility requires the Company to pay lenders a commitment fee of i0.125% to i0.325%
based on a ratings grid. As of April 2, 2021, there were no amounts outstanding under the Revolving Credit Facility. The
/
14
Revolving Credit Facility bears interest at a variable rate equal to LIBOR plus a ratings-based margin which was i142.5
basis points as of April 2, 2021.
Senior Unsecured Notes
On March 10, 2021, we completed the private placement of each of the following series of senior unsecured notes (collectively, the “Notes”) to qualified institutional buyers under rule 144A of the Securities Act of 1933, as amended (the “Securities Act”) and outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act:
•$i500.0 million
aggregate principal amount of senior notes due April 1, 2026 (the “2026 Notes”) issued at i99.855% of their principal amount and bearing interest at the rate of i1.800%
per year;
•$i500.0 million aggregate principal amount of senior notes due April 1, 2028 (the “2028 Notes”) issued at i99.703%
of their principal amount and bearing interest at the rate of i2.400% per year; and
•$i600.0 million aggregate principal
amount of senior notes due April 1, 2031 the (the “2031 Notes”) issued at i99.791% of their principal amount and bearing interest at the rate of i2.950%
per year
The Notes are fully and unconditionally guaranteed (the “Guarantees”), on a joint and several basis, by Gilbarco Inc. and Matco Tools Corporation, two of our wholly-owned subsidiaries (the “Guarantors”). Interest on the Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2021. The Notes and the Guarantees are the Company’s and the Guarantors’ general senior unsecured obligations.
The Company received approximately $i1.6 billion
in net proceeds from the issuance of the Notes, which was partially offset by discounts of $i3.5 million and debt issuance costs of $i13.9 million. The
Company used the net proceeds to repay the Two-Year Term Loans in full and $i400.0 million of our Three-Year Term Loans with the remainder used for working capital and other general corporate purposes.
In connection with the issuance of the Notes, we entered into a registration rights agreement, pursuant to which we are obligated to use commercially reasonable efforts to file with the U.S. Securities and Exchange Commission, and cause
to be declared effective within 365 days, a registration statement with respect to an offer to exchange each series of Notes for registered notes with terms that are substantially identical to the Notes of each series. Alternatively, if the exchange offers are not available or cannot be completed, we would be required to use commercially reasonable efforts to file, and cause to become effective, a shelf registration statement to cover resales of the Notes under the Securities Act. If we do not comply with these obligations, we will be required to pay additional interest on the Notes.
We may redeem some or all of each series of the Notes at any time prior to the dates specified in the Notes indenture (the “Call Dates”) at a redemption price equal to the greater of (i) 100% of the principal amount of the Notes of such series to
be redeemed, and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on such series of Notes to be redeemed discounted to the date of redemption on a semi-annual basis at the applicable Treasury Rate plus ii20/
basis points in the case of the 2026 Notes and 2028 Notes and plus i25 basis points in the case of the 2031 Notes, plus the accrued and unpaid interest. Call dates for the 2026 Notes, 2028 Notes and 2031 Notes are March 1, 2026, February 1, 2028 and January 1, 2031, respectively.
If a change of control triggering event occurs, we will, in certain circumstances, be required
to make an offer to repurchase the Notes at a purchase price equal to i101% of the aggregate principal amount plus accrued and unpaid interest. A change of control triggering event is defined as the occurrence of both a change of control and a rating event, each as defined in the Notes indenture. Except in connection with a change of control triggering event, the Notes do not have any credit rating downgrade triggers
that would accelerate the maturity of the Notes.
The Notes contain customary covenants, including limits on the incurrence of certain secured debt and sale-leaseback transactions. None of these covenants are considered restrictive to our operations and as of April 2, 2021, we were in compliance with all of the covenants under the Notes.
The estimated fair value of the Notes was $i1.6 billion as of April
2, 2021. The fair value of the Notes was determined based upon Level 2 inputs including indicative prices based upon observable market data. The difference between the fair value and the carrying amounts of the Notes may be attributable to changes in market interest rates and/or our credit ratings subsequent to the incurrence of the borrowing.
15
Short-term Borrowings
India Credit Facility
The Company has a credit facility with Citibank, N.A. with borrowing capacity of up to i850.0 million
Indian Rupees (or $i11.6 million as of April 2, 2021) to facilitate working capital needs for certain businesses in India. As of April 2, 2021, the Company had $i6.2 million
borrowing capacity remaining. The effective interest rate associated with outstanding borrowings was i5.00% as of April 2, 2021.
Other
As of April 2, 2021, certain of our businesses were in a cash overdraft position, and such overdrafts are included in Short-term borrowings on the Consolidated Condensed Balance Sheet.
Interest
payments associated with the above short-term borrowings were immaterial for the three months ended April 2, 2021 and March 27, 2020.
i
NOTE 5. ACCUMULATED OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.
i
The changes in Accumulated other comprehensive income by component are summarized below:
(a)
Includes balances relating to defined benefit plans and supplemental executive retirement plans.
(b) This accumulated other comprehensive income component is included in the computation of net periodic pension cost.
//
16
i
NOTE
6. SALES
i
Revenue is recognized when control of promised products or services is transferred to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those products or services.
In certain circumstances, we record contract
assets which include unbilled amounts typically resulting from sales under contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is subject to contractual performance obligations and not only subject to the passage of time. Contract assets were $i10.5 million and $i9.0 million
as of April 2, 2021 and December 31, 2020, respectively, and are included in Prepaid expenses and other current assets.
We incur direct incremental costs to obtain certain contracts, typically sales-related commissions and costs associated with assets used by our customers in certain service arrangements. As of April 2, 2021 and December 31, 2020, we had $i78.2
million and $i81.2 million, respectively, in net revenue-related capitalized contract costs primarily related to assets used by our customers in certain software contracts, which are recorded in Prepaid expenses and other current assets, for the current portion, and Other assets, for the noncurrent portion, in the accompanying Consolidated Condensed Balance Sheets. These assets have estimated
useful lives between i3 and i5 years and are amortized on a straight-line basis.
Impairment losses recognized on our revenue-related contract
assets were insignificant during the three months ended April 2, 2021.
The Company’s contract liabilities consist of deferred revenue generally related to post contract support (“PCS”) and extended warranty sales. In these arrangements, the Company generally receives up-front payment and recognizes revenue over the support term of the contracts.
Deferred revenue is classified as current or noncurrent based on the timing of when revenue is expected to be recognized and is included in Accrued expenses and other current liabilities and Other long-term liabilities, respectively, in the accompanying Consolidated Condensed Balance Sheets.
Remaining performance obligations represent the transaction price of firm, noncancelable orders and the annual contract value for software-as-a-service contracts with expected customer delivery dates beyond one year from April 2, 2021 for which work has not been performed. The Company has
excluded performance obligations with an original expected duration of one year or less. Performance obligations as of April 2, 2021 are $i399.4 million, the majority of which are related to the annual contract value for software-as-a-service contracts. The
Company expects approximately i35 percent of the remaining performance obligations will be fulfilled within the next itwo
years, i65 percent within the next ithree years, and substantially all within ifour
years.
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17
Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers by sales of products and services, geographic location, solution and major product group, as it best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
(a)
Includes sales in the United States of $i494.2 million and $i424.9 million
for the three months ended April 2, 2021 and March 27, 2020, respectively.
/i
NOTE 7. INCOME TAXES
Our effective tax rate for the three
months ended April 2, 2021 was i23.6% as compared to i119.7% for the three months ended March
27, 2020. The year-over-year decrease in the effective tax rate for the three months ended April 2, 2021 as compared to the comparable period in the prior year was primarily due to a non-deductible book goodwill impairment recognized in the three months ended March 27, 2020.
/
Our effective tax rate for 2021 and 2020 differs from the U.S. federal statutory rate of 21% due primarily to the effect of state taxes and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, in 2020, there was an unfavorable impact related to a non-deductible book goodwill impairment.
18
i
NOTE
8. LEASES
Operating lease cost was $i5.9 million and $i5.2 million for the three months ended April
2, 2021 and March 27, 2020, respectively. During the three month periods ended April 2, 2021 and March 27, 2020, cash paid for operating leases included in operating cash flows was $i4.9 million and $i4.7
million, respectively. Right-of-use assets obtained in exchange for operating lease obligations were $i3.4 million and insignificant for the three months ended April 2, 2021 and March 27, 2020, respectively.
/i
NOTE
9. LITIGATION AND CONTINGENCIES
Warranty
We generally accrue estimated warranty costs at the time of sale. In general, manufactured products are warrantied against defects in material and workmanship when properly used for their intended purpose, installed correctly, and appropriately maintained. Warranty period terms depend on the nature of the product and range from ninety days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor, and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
i
The
following is a rollforward of the Company’s accrued warranty liability:
In accordance with accounting guidance, the Company
records a liability in the Consolidated and Combined Condensed Financial Statements for loss contingencies when a loss is known or considered probable and the amount can be reasonably estimated. If the reasonable estimate of a known or probable loss is a range, and no amount within the range is a better estimate than any other, the minimum amount of the range is accrued. If a loss does not meet the known or probable level but is reasonably possible and a loss or range of loss can be reasonably estimated, the estimated loss or range of loss is disclosed. These reserves consist of specific reserves for individual claims and additional amounts for anticipated developments of these claims as well as for incurred but not yet reported claims. The specific reserves for individual known claims are quantified with the assistance of legal counsel and outside risk insurance professionals where appropriate. In addition, outside risk insurance professionals may assist in the determination
of reserves for incurred but not yet reported claims through evaluation of our specific loss history, actual claims reported, and industry trends among statistical and other factors. Reserve estimates are adjusted as additional information regarding a claim becomes known. While we actively pursue financial recoveries from insurance providers, the Company does not recognize any recoveries until realized or until such time as a sustained pattern of collections is established related to historical matters of a similar nature and magnitude. If the risk insurance reserves the Company has established are inadequate, we would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our net earnings.
In
connection with the recognition of liabilities for asbestos related matters, the Company records insurance recoveries that are deemed probable and estimable. In assessing the probability of insurance recovery, we make judgments concerning insurance coverage that we believe are reasonable and consistent with our historical dealings, our knowledge of any pertinent solvency issues surrounding insurers, and litigation and court rulings potentially impacting coverage. While the substantial majority of our insurance carriers are solvent, some of our individual carriers are insolvent, which has been considered in the analysis of probable recoveries. Projecting future events is subject to various uncertainties, including litigation and court rulings potentially impacting coverage, that could cause insurance recoveries on asbestos related liabilities to be higher or lower than those projected
and recorded. Given the inherent uncertainty in making future projections, the Company reevaluates projections concerning the Company’s probable insurance recoveries considering any changes to the projected liabilities, the Company’s recovery experience or other relevant factors that may impact future insurance recoveries.
We recorded gross liabilities associated with known and future expected asbestos claims of $i67.4
million and $i68.0 million as of April 2, 2021 and December 31, 2020, respectively. Known and future expected asbestos claims of $i16.9 million
and $i17.5
/
19
million are included in Accrued expenses and other current liabilities on the Consolidated Condensed Balance Sheets as of April 2, 2021 and
December 31, 2020, respectively. Known and future expected asbestos claims of $ii50.5/
million are included in Other long-term liabilities on the Consolidated Condensed Balance Sheets as of both April 2, 2021 and December 31, 2020, respectively.
We recorded the related projected insurance recoveries of $i35.9 million and $i36.0
million as of April 2, 2021 and December 31, 2020, respectively. Insurance recoveries in the accompanying Consolidated Condensed Balance Sheets as of April 2, 2021 include $i10.7 million in Prepaid expenses and other current assets and $i25.2 million
in Other assets. Insurance recoveries in the accompanying Consolidated Condensed Balance Sheets as of December 31, 2020 include $i10.8 million in Prepaid expenses and other current assets and $i25.2
million in Other assets.
Guarantees
As of April 2, 2021 and December 31, 2020, we had guarantees consisting primarily of outstanding standby letters of credit, bank guarantees, and performance and bid bonds of approximately $i102.5 million and $i84.5 million,
respectively. These guarantees have been provided in connection with certain arrangements with vendors, customers, financing counterparties, and governmental entities to secure our obligations and/or performance requirements related to specific transactions. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations.
Refer to Note 4. Financing for information regarding guarantees of the Notes by certain of our wholly-owned subsidiaries.
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NOTE
10. FAIR VALUE MEASUREMENTS
Accounting standards define fair value based on an exit price model, establish a framework for measuring fair value where our assets and liabilities are required to be carried at fair value and provide for certain disclosures related to the valuation methods used within a valuation hierarchy as established within the accounting standards. This hierarchy prioritizes the inputs into three broad levels as follows:
•Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, or other observable characteristics for the asset or liability,
including interest rates, yield curves and credit risks, or inputs that are derived principally from, or corroborated by, observable market data through correlation.
•Level 3 inputs are unobservable inputs based on our assumptions.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
i
Below
is a summary of financial liabilities that are measured at fair value on a recurring basis as of:
Certain
management employees participate in our nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis, until after their termination of employment. All amounts deferred under such plans are unfunded, unsecured obligations and are presented as a component of our compensation and benefits accrual included in Other long-term liabilities in the accompanying Consolidated Condensed Balance Sheets. Participants may choose among alternative earning rates for the amounts they defer, which are primarily based on investment options within our defined contribution plans for the benefit of U.S. employees (“401(k) Programs”) (except that the earnings rates for amounts contributed unilaterally by the Company are entirely based on changes in the value of our common stock). Changes in the
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20
deferred
compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates.
Other Investments
The Company holds a minority interest in Tritium Holdings Pty, Ltd (“Tritium”) of $i52.8 million, which is recorded in
Other assets on the Consolidated Condensed Balance Sheets at cost. The Company has elected to use the measurement alternative for equity investments without readily determinable fair values and evaluate this investment for indicators of impairment quarterly. The Company did not identify events or changes in circumstances that may have a significant effect on the fair value of the investment during the three months ended April 2, 2021. During the three months ended April 2, 2021, we made an additional investment in Tritium of $i3.8 million.
Nonrecurring
Fair Value Measurements
Certain assets and liabilities are carried on the accompanying Consolidated Condensed Balance Sheets at cost and are not remeasured to fair value on a recurring basis. These assets include finite-lived intangible assets, which are tested when a triggering event occurs, and goodwill and identifiable indefinite-lived intangible assets, which are tested for impairment at least annually as of the first day of the fourth quarter or more frequently if events and circumstances indicate that the asset may not be recoverable.
As of April 2, 2021, assets carried on the balance sheet and not remeasured to fair value on a recurring basis were $i1.1
billion of goodwill and $i241.1 million of identifiable intangible assets, net.
Refer to Note 4. Financing for information related to the fair value of the Company’s borrowings.
i
NOTE
11. RELATED-PARTY TRANSACTIONS
In connection with the Separation, we entered into the Agreements with Fortive which govern the Separation and provide a framework for the relationship between the parties going forward, including an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, an FBS license agreement and a transition services agreement.
Employee Matters Agreement
The employee matters agreement sets forth, among other things, the allocation of assets, liabilities and responsibilities relating to employee compensation and benefit plans and programs and other related matters in connection with the Separation, including the treatment of outstanding equity and other incentive awards and certain retirement and welfare benefit obligations.
Tax Matters
Agreement
The tax matters agreement governs the respective rights, responsibilities and obligations of both Fortive and Vontier after the Separation with respect to tax liabilities and benefits, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings and other matters regarding taxes.
Intellectual Property Matters Agreement
The intellectual property matters agreement sets forth the terms and conditions pursuant to which Fortive and Vontier have mutually granted certain personal, generally irrevocable, non-exclusive, worldwide, and royalty-free rights to use certain intellectual property. Both parties are able to sublicense their rights in connection with activities relating to their businesses, but not for independent use by third
parties.
FBS License Agreement
The FBS license agreement sets forth the terms and conditions pursuant to which Fortive has granted a non-exclusive, worldwide, non-transferable, perpetual license to us to use FBS solely in support of our businesses. We are able to sublicense such license solely to direct and indirect wholly-owned subsidiaries.
Transition Services Agreement (“TSA”)
The TSA sets forth the terms and conditions pursuant to which Vontier and our subsidiaries and Fortive and its subsidiaries
will provide to each other various services after the Separation. The services to be provided include information technology, facilities, certain accounting and other financial functions, and administrative services. The charges for the transition services
21
generally are expected to allow the providing company to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the service, plus, in some cases, the allocated indirect costs of providing the services, generally without profit.
TSA Payments
In accordance with the TSA, receipts from Fortive were immaterial during the three months ended April
2, 2021. During the three months ended April 2, 2021, we made net payments to Fortive of $i48.5 million, which included approximately $i30 million
of our share of the transaction taxes related to the Separation.
Allocations of Expenses Prior to the Separation
The Company has historically operated as part of Fortive and not as a stand-alone company. Accordingly, certain shared costs have been allocated to the Company by Fortive, and are reflected as expenses in these financial statements. Management considers the allocation methodologies used to be reasonable and appropriate reflections of the related expenses attributable to the Company for purposes of the carve-out financial statements; however, the expenses reflected in the accompanying Combined Condensed Financial
Statements may not be indicative of the actual expenses that would have been incurred during the periods presented if the Company had operated as a separate stand-alone entity and the expenses that will be incurred in the future by the Company.
i
The amount of related party expenses allocated to the Company
from Fortive and its subsidiaries for the three months ended March 27, 2020, were as follows:
($ in millions)
Allocated corporate expenses
$
i10.6
Directly
attributable expenses:
Insurance programs expenses
i0.6
Medical
insurance programs expenses
i11.3
Deferred compensation program expenses
i0.3
Total
related-party expenses
$
i22.8
/
Corporate
Expenses
Certain corporate overhead and other shared expenses incurred by Fortive and its subsidiaries have been allocated to the Company and are reflected in the accompanying Combined Condensed Statements of Earnings (Loss) and Comprehensive Income (Loss) for the three months ended March 27, 2020. These amounts include, but are not limited to, items such as general management and executive oversight, costs to support Vontier information technology infrastructure, facilities, compliance, human resources, and marketing, as well as legal functions and financial management and transaction processing, including public company reporting, consolidated tax filings, and tax planning, Fortive
benefit plan administration, risk management and consolidated treasury services, certain employee benefits and incentives, and stock-based compensation administration. These costs have been allocated using a methodology that management believes is reasonable for the item being allocated. Allocation methodologies include the Company’s relative share of revenues, headcount, or functional spend as a percentage of the total. Following the Separation, we independently incur corporate overhead costs and no corporate overhead costs were allocated by Fortive.
Insurance Programs Administered by Fortive
In addition to the corporate allocations noted above, prior to the Separation, the Company
was allocated expenses related to certain insurance programs Fortive administered on behalf of the Company, including automobile liability, workers’ compensation, general liability, product liability, director’s and officer’s liability, cargo, and property insurance. These amounts were allocated using various methodologies, as described below.
Included within the insurance cost allocation are amounts related to programs for which Fortive was self-insured up to a certain amount. For the self-insured component, costs were allocated to the Company based on its incurred claims. Fortive has premium-based policies that cover amounts in excess of the self-insured retentions. Prior to the Separation, the
Company was allocated a portion of the total insurance cost incurred by Fortive based on its pro-rata portion of Fortive’s total underlying
22
exposure base. In connection with the Separation, we established similar independent self-insurance programs to support any outstanding claims going forward and no insurance costs were allocated by Fortive subsequent to the Separation.
Medical Insurance Programs Administered by Fortive
In addition to the corporate allocations noted above, the Company was allocated expenses related to the medical insurance programs administered
on behalf of the Company. These amounts were allocated using actual medical claims incurred during the period for the employees attributable to the Company. In connection with the Separation, we established independent medical insurance programs similar to those previously provided by Fortive.
Deferred Compensation Program Administered by Fortive
Certain employees of the Company participated in Fortive’s nonqualified deferred compensation programs, which permitted officers, directors and certain management employees to defer a portion of their compensation, on a pretax basis, until after
their termination of employment. Participants could have chosen among alternative earnings rates for the amounts they deferred, which were primarily based on investment options within Fortive’s 401(k) program (except that the earnings rates for amounts contributed unilaterally by Fortive were entirely based on changes in the value of Fortive’s common stock). All amounts deferred under this plan are unfunded, unsecured obligations of the Company. In connection with the Separation, we established a similar independent, nonqualified deferred compensation program.
Revenue and Other Transactions Entered into in the Ordinary Course of Business
Prior to the Separation, we operated as part of Fortive and not as a stand-alone company and certain of our revenue
arrangements related to contracts entered into in the ordinary course of business with Fortive and its affiliates. Following the Separation, we continue to enter into arms-length revenue arrangements in the ordinary course of business with Fortive and its affiliates, although certain agreements were entered into or terminated as a result of the Separation.
Certain of our revenue arrangements related to contracts entered into in the ordinary course of business with Fortive and its affiliates. Our revenue from sales to Fortive and its subsidiaries was insignificant during the three months ended April
2, 2021 and March 27, 2020.
Purchases from Fortive and Fortive’s subsidiaries were immaterial during the three months ended April 2, 2021 and were $i3.6 million during the three months ended March 27, 2020.
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NOTE
12. CAPITALIZATION AND EARNINGS PER SHARE
Capital Stock
The Company’s authorized capital stock consists of i1,985,000,000 shares of common stock, par value $i0.0001
per share, and i15,000,000 shares of preferred stock with ino par value, all of which shares of preferred stock are undesignated.
Earnings
Per Share
Basic earnings per share is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted earnings per share is similarly calculated, except that the calculation includes the dilutive effect of the assumed issuance of shares under stock-based compensation plans except where the inclusion of such shares would have an anti-dilutive impact.
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i
Information
related to the calculation of net earnings per share of common stock is summarized as follows:
Three Months Ended
($ and shares in millions, except per share amounts)
Diluted
weighted average common shares outstanding
i169.7
i168.4
Earnings
(loss) per share:
Basic
$
i0.54
$
(i0.02)
Diluted
$
i0.54
$
(i0.02)
Anti-dilutive
shares
i2.9
i—
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NOTE
13. SUBSEQUENT EVENTS
On April 28, 2021 (the “Closing Date”), the Company refinanced its Credit Agreement. The amended and restated credit agreement (the “A&R Credit Agreement”) extended the term of the fully drawn $i400.0 million senior unsecured term loan facility (the “Term Loan Facility”), from October
6, 2023 to October 28, 2024. The A&R Credit Agreement also lowered the Term Loan Facility variable interest rate, determined based upon a ratings-based pricing grid, by i50 basis points, from LIBOR plus i162.5
basis points under the prior agreement to LIBOR plus i112.5 basis points as of the Closing Date.
The A&R Credit Agreement extended the term of the undrawn $i750.0 million
senior unsecured, multi-currency revolving credit facility (the “Revolving Credit Facility”) from September 29, 2023 to April 28, 2026. The A&R Credit Agreement also lowered the Revolving Credit Facility variable interest rate, determined based upon a ratings-based pricing grid, by i25 basis points, from LIBOR plus i142.5
basis points under the prior agreement to LIBOR plus i117.5 basis points as of the Closing Date.
The A&R Credit Agreement also made certain other changes to the Credit Agreement to address the discontinuation of LIBOR and its impact on U.S. dollar and multicurrency loans, as well as other immaterial changes. The Company’s two wholly-owned subsidiaries
which were Guarantors under the Credit Agreement continue to be Guarantors under the A&R Credit Agreement.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Vontier Corporation (“Vontier,” the “Company,”“we,”“us,” or “our”) is a global industrial technology company that focuses on critical technical equipment, components,
software and services for manufacturing, repair, and servicing in the mobility infrastructure industry worldwide. The Company supplies a wide range of mobility technologies and diagnostics and repair technologies solutions spanning advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software-as-service solutions, professional vehicle mechanics’ and technicians’ equipment and traffic priority control systems. The Company markets its 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.
This Management’s
Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of management and is intended to help the reader understand the results and operations and financial condition of the Company. Our MD&A should be read in conjunction with the MD&A and Consolidated and Combined Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (the “2020 Annual Report on Form 10-K”).
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
Certain
statements included or incorporated by reference in this quarterly report, in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”), in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the United States federal securities laws.
Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date of the Report, document,
press release, webcast, call, materials or other communication in which they are made. Important factors that could cause actual results to differ materially from those envisaged in the forward-looking statements include the following:
•The effect of the COVID-19 pandemic on our global operations and on the operations of our customers, suppliers, and vendors is having, and is expected to continue to have, a significant impact on our business and results of operations.
•Changes in, or status of implementation of, industry standards and governmental regulations, including interpretation or enforcement thereof, may reduce demand for our products or services, increase our expenses or otherwise adversely impact our business
model.
•Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation.
•The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
•Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our financial statements and our business, including our reputation.
•International economic, political, legal, compliance, epidemic and business factors could negatively affect our financial statements.
•We
may be required to recognize impairment charges for our goodwill and other intangible assets.
•We are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows.
•Our restructuring actions could have long-term adverse effects on our business.
•Our defined benefit pension plans are subject to financial market risks that could adversely affect our financial statements.
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•As of the date of this quarterly report, we have outstanding indebtedness of approximately
$2.0 billion and the ability to incur an additional $750.0 million of indebtedness under the Revolving Credit Facility, as defined above, and in the future we may incur additional indebtedness, all of which could adversely affect our businesses and our ability to meet our obligations and pay dividends.
•We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
•Any inability to consummate acquisitions at our historical rates and at appropriate prices, and to make appropriate investments that support our long-term strategy, could negatively impact our growth rate and stock price.
•Our acquisition of businesses, investments,
joint ventures and other strategic relationships could negatively impact our financial statements.
•Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
•Adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements.
•Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations.
•If we cannot adjust our manufacturing
capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies.
•Potential indemnification liabilities to Fortive pursuant to the Separation agreement could materially and adversely affect our businesses, financial condition, results of operations and cash flows. In addition, there can be no assurance that Fortive’s performance of its indemnity obligations to us under the separation agreement regarding certain liabilities will be sufficient.
•If there is a determination that the distribution, together with certain related transactions, is taxable for U.S. federal
income tax purposes because the facts, assumptions, representations or undertakings underlying Fortive’s private letter ruling from the IRS or tax opinion are incorrect or for any other reason, then Fortive and its stockholders could incur significant U.S. federal income tax liabilities, and we could also incur significant liabilities.
•We may be affected by significant restrictions, including on our ability to engage in certain corporate transactions for a two-year period after the distribution in order to avoid triggering significant tax-related liabilities.
•Fortive may compete with us.
•We may not achieve some or all of the expected benefits of the Separation, and the Separation may adversely affect our businesses.
See
“Item 1.A. Risk Factors” in our 2020 Annual Report on Form 10-K and Part II - Item 1A. Risk Factors” in this Form 10-Q for a further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. We do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
OVERVIEW
General
Vontier
is a global industrial technology company that focuses on critical technical equipment, components, software and services for manufacturing, repair, and servicing in the mobility infrastructure industry worldwide. We supply a wide range of mobility technologies and diagnostics and repair technologies solutions spanning advanced environmental sensors, fueling equipment, field payment hardware, remote management and workflow software, vehicle tracking and fleet management software-as-service solutions, professional vehicle mechanics’ and technicians’ equipment and traffic priority control systems. 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.
26
Our
research and development, manufacturing, sales, distribution, service and administrative operations are located in more than 30 countries across North America, Asia Pacific, Europe and Latin America. In addition, we sell our products in these countries and multiple other markets in these regions. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure, which include Eastern Europe, the Middle East, Africa, Latin America, and Asia, with the exception of Japan and Australia.
BUSINESS PERFORMANCE AND OUTLOOK
Business Performance
While differences exist among our businesses, on an overall basis, demand for our hardware and software products and services increased during the three month period ended April
2, 2021. As compared to the comparable period of 2020, aggregate year-over-year total sales increased 16.1% for the three months ended April 2, 2021. Sales from existing businesses increased 14.3% during the three months ended April 2, 2021, as compared to the comparable period in 2020. The increase in total sales and sales from existing businesses during the three months ended April 2, 2021 was primarily driven by broad growth across the portfolio including retail and environmental solutions, continued strong demand for and shipments of fuel management systems in North America related to the enhanced credit card security requirements for outdoor payment systems based on the Europay, Mastercard and Visa (“EMV”) global standards, Mexico regulatory demand and dispenser and environmental deliveries in India. Our
diagnostics and repair portfolio also experienced strong demand across most product categories, most notably specialty and hardline tools. Changes in foreign currency exchange rates positively impacted our sales growth by 1.8% during the three months ended April 2, 2021 compared to the comparable period in 2020.
In developed markets, year-over-year total sales and sales from existing businesses for the three months ended April 2, 2021 increased at a rate in the mid-teens and low-double digits, respectively, which was primarily due to growth in North America at a rate in the mid-teens. This growth was partially offset by a decline in total sales and sales from existing businesses in Western Europe. High growth markets had a more than 20% increase primarily due to growth in India and Latin America.
Outlook
We
expect overall sales and sales from existing businesses to grow on a year-over-year basis in 2021; however, we are continuing to monitor the impact of the COVID-19 pandemic and geopolitical and regulatory uncertainties and the corresponding impact to our businesses in addition to the other factors identified above in “Information Relating to Forward- Looking Statements.”
Selling,
general and administrative expenses ("SG&A")
(145.7)
(123.1)
Research and development expenses ("R&D")
(33.2)
(32.9)
Impairment of goodwill
—
(85.3)
Operating
profit
$
132.9
$
21.8
Gross profit as a % of sales
44.1
%
43.2
%
SG&A
as a % of sales
20.6
%
20.2
%
R&D as a % of sales
4.7
%
5.4
%
Operating profit as a % of sales
18.8
%
3.6
%
27
Components
Sales Growth
% Change Three Months Ended April 2, 2021 vs. Comparable 2020 Period
Total revenue growth (GAAP)
16.1
%
Existing businesses (Non-GAAP)
14.3
%
Currency
exchange rates (Non-GAAP)
1.8
%
Total sales and sales from existing businesses within our mobility technologies platform increased at a rate in the mid-teens and a low-double digit rate, respectively, during the three months ended April 2, 2021 as compared to the comparable period of 2020. The year-over-year results during the three months ended April 2, 2021 were primarily driven by broad growth across the portfolio including retail and environmental solutions, continued strong demand for and shipments of
fuel management systems in North America related to the enhanced credit card security requirements for outdoor payment systems based on the EMV global standards, Mexico regulatory demand and dispenser and environmental deliveries in India.
Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased at a rate in the high-teens during the three months ended April 2, 2021 as compared to the comparable period in 2020. The results in the three months ended April 2, 2021 were driven principally by strong demand across most product categories, most notably specialty and hardline tools.
Price increases are reflected as a component of the change in sales from existing businesses, and year-over-year price
increases contributed 1.0% to sales growth during the three months ended April 2, 2021 versus the comparable period in 2020.
Cost of Sales
Cost of sales increased $49.5 million for the three months ended April 2, 2021, as compared to the comparable period in 2020, due primarily to higher year-over-year sales volumes from existing businesses as well as increased costs of materials due to inflationary pressures.
Gross Profit
The year-over-year increase in gross profit during the three months ended April 2, 2021, as compared to the comparable period in 2020, is primarily due to
a favorable sales mix which was partially offset by increased costs of materials due to inflationary pressures.
The 90 basis point increase in gross profit margin during the three months ended April 2, 2021 as compared to the comparable period in 2020 is primarily due to a favorable sales mix.
Operating Costs and Other Expenses
SG&A expenses increased during the three months ended April 2, 2021, as compared to the comparable period in 2020, primarily due to the increase of corporate costs associated with operating as a separate public company.
On a year-over-year basis, SG&A expenses as a percentage of sales increased
40 basis points during the three months ended April 2, 2021, as compared to the comparable period in 2020 due to the increase of corporate costs associated with operating as a separate public company which was partially offset by the increase of sales as compared to the same period in 2020.
R&D expenses (consisting principally of internal and contract engineering personnel costs) were relatively flat during the three months ended April 2, 2021, as compared to the comparable period in 2020. On a year-over-year basis, R&D expenses as a percentage of sales decreased during the three months ended April 2, 2021 due to consistent levels of R&D expenses while total
sales increased.
28
Operating Profit
Operating profit margin increased 1520 basis points during the three months ended April 2, 2021 as compared to the comparable period in 2020.
Year-over-year operating profit margin comparisons were favorably impacted by:
•Higher year-over-year sales volumes, price increases and a favorable sales mix — favorable 700 basis points
•The impact of the prior year goodwill impairment
of our Telematics business — favorable 1200 basis points
Year-over-year operating profit margin comparisons were primarily impacted by the following unfavorable factors:
•Corporate costs associated with operating as a separate public company and other operating costs — unfavorable 330 basis points
•Increased costs of materials due to inflationary pressures — unfavorable 50 basis points
NON-GAAP FINANCIAL MEASURES
Sales from Existing Businesses
We define sales from existing businesses as total sales excluding (i) sales from acquired and divested businesses; (ii) the impact of
currency translation; and (iii) certain other items.
•References to sales attributable to acquisitions or acquired businesses refer to GAAP sales from acquired businesses recorded prior to the first anniversary of the acquisition less the amount of sales attributable to certain divested businesses or product lines not considered discontinued operations.
•The portion of sales attributable to the impact of currency translation is calculated as the difference between (a) the period-to-period change in sales (excluding sales from acquired businesses) and (b) the period-to-period change in sales, including foreign operations, (excluding sales from acquired businesses) after applying the current period foreign exchange rates to the prior year period.
•The
portion of sales attributable to other items is calculated as the impact of those items which are not directly correlated to sales from existing businesses which do not have an impact on the current or comparable period.
Sales from existing businesses should be considered in addition to, and not as a replacement for or superior to, total sales, and may not be comparable to similarly titled measures reported by other companies.
Management believes that reporting the non-GAAP financial measure of sales from existing businesses provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our sales performance with our performance in prior and future periods and to our peers. We exclude the effect of acquisitions and divestiture-related items because the nature, size and
number of such transactions can vary dramatically from period to period and between us and our peers. We exclude the effect of currency translation and certain other items from sales from existing businesses because these items are either not under management’s control or relate to items not directly correlated to sales from existing businesses. Management believes the exclusion of these items from sales from existing businesses may facilitate assessment of underlying business trends and may assist in comparisons of long-term performance. References to sales volume refer to the impact of both price and unit sales.
INCOME TAXES
General
Income tax expense and
deferred tax assets and liabilities reflect management’s assessment of future taxes expected to be paid on items reflected in our financial statements. Our effective tax rate can be affected by, among other items, changes in the mix of earnings in countries with differing statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities and changes in tax laws.
Prior to the Separation, our operating results were included in Fortive’s various consolidated U.S. federal and certain state income tax returns, as well as certain non-U.S. returns. For periods prior to the Separation, our combined financial statements
29
reflect
income tax expense and deferred tax balances as if we had filed tax returns on a standalone basis separate from Fortive. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the periods prior to the Separation. For periods prior to the Separation, our pretax operating results include any transactions with Fortive as if it were an unrelated party.
In connection with the Separation, we entered into agreements with Fortive, including a Tax Matters Agreement. The Tax Matters Agreement distinguishes between the treatment of tax matters for “joint” filings compared to “separate” filings prior to the Separation. “Joint” filings are returns, such as the United States federal return, that include operations from both Fortive legal entities and the
Company. By contrast, “separate” filings are tax returns (primarily U.S. state returns and non-U.S. returns), that exclusively include either Fortive’s or the Company’s operations, respectively. In accordance with the Tax Matters Agreement, the Company is liable for and has indemnified Fortive against all income tax liabilities involving “separate” filings for periods prior to the Separation.
On March 27, 2020, the U.S. Government passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) as an emergency economic stimulus package in response to the COVID-19 outbreak. The CARES Act contains, among other things, numerous income tax provisions.
Some of these tax provisions are expected to be effective retroactively for years ended before the date of enactment. The CARES Act did not have a significant impact on our income tax provision.
We are routinely examined by various domestic and international taxing authorities. The amount of income taxes we pay is subject to audit by federal, state and foreign tax authorities, which may result in proposed assessments. The Company is subject to examination in the United States, various states and foreign jurisdictions. In accordance with the Tax Matters Agreement with Fortive, the Company is liable for taxes arising from examinations of the following: (i) the
Company’s initial U.S. federal taxable year October 9, 2020 through December 31, 2020; (ii) separate company state tax returns for all periods; (iii) joint state tax returns for the period October 9, 2020 through December 31, 2020; (iv) international separate company returns for all periods; and (v) joint international tax returns that include only Vontier legal entities for all periods. We review our global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions and the expiration of statutes of limitations reserves for contingent tax liabilities are accrued or adjusted as necessary.
Pursuant
to U.S. tax law, the Company’s initial U.S. federal income tax return is for the short taxable year October 9, 2020 through December 31, 2020. We expect to file our initial U.S. federal income tax return for the 2020 short tax year with the Internal Revenue Service (“IRS”) during 2021. Therefore, the IRS has not yet begun examination of the Company. The Company remains subject to tax audit for its separate company tax returns in various U.S. states for the tax years 2011 to 2020. Our operations in certain foreign jurisdictions remain subject to routine examination for the tax years 2007 to 2020.
Our effective tax rate for the three months ended April 2, 2021 was 23.6% as compared to 119.7% for the three months ended March 27, 2020. The year-over-year decrease in the effective tax rate for the three months ended April 2, 2021 as compared to the comparable period in the prior year was primarily due to a non-deductible book goodwill impairment recognized in the three months ended March 27, 2020.
Our effective tax rate for 2021 and 2020 differs from the U.S. federal statutory rate of 21%
due primarily to the effect of state taxes and foreign taxable earnings at a rate different from the U.S. federal statutory rate. Additionally, in 2020, there was an unfavorable impact related to a non-deductible book goodwill impairment.
COMPREHENSIVE INCOME
Comprehensive income increased by $124.1 million during the three months ended April 2, 2021 as compared to the comparable period in 2020 due primarily to net earnings that were higher by $95.2 million and favorable changes in foreign currency translation adjustments of $30.5 million.
30
LIQUIDITY
AND CAPITAL RESOURCES
Prior to the Separation, we were dependent upon Fortive for all our working capital and financing requirements under Fortive’s centralized approach to cash management and financing of operations of its subsidiaries. With the exception of cash, cash equivalents and borrowings clearly associated with Vontier and related to the Separation, including the financial transactions described below, financial transactions relating to our business operations prior to the Separation were accounted for through Former Parent’s investment. Accordingly, none of the Former Parent’s cash, cash equivalents or debt at the corporate level was assigned to us in the financial statements for periods prior to the Separation.
As a result of the Separation, we no longer participate
in Fortive’s cash management and financing operations. We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. We generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity will be sufficient to allow us to continue to invest in existing businesses, consummate strategic acquisitions, make interest payments on our outstanding indebtedness, and manage our capital structure on a short and long-term basis.
2021 Financing and Capital Transactions
During the first quarter of 2021, we completed the following financing and capital transactions:
•On March 10, 2021, we completed the private placement of $1.6 billion of senior unsecured notes
in multiple series (collectively, the “Notes”). The Notes are fully and unconditionally guaranteed (the “Guarantees”), on a joint and several basis, by Gilbarco Inc. and Matco Tools Corporation, two of our wholly-owned subsidiaries (the “Guarantors”). Interest on the Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2021. The Notes and the Guarantees are the Company’s and the Guarantors’ general senior unsecured obligations.
•With the proceeds received from the issuance of the Notes, we repaid $1.4 billion of our Term Loans with the remainder used for working capital and other general corporate purposes.
Our
long-term debt requires, among others, that we maintain certain financial covenants, and we were in compliance with all of these covenants as of April 2, 2021.
Refer also to Note 4. Financing to the Consolidated and Combined Condensed Financial Statements for additional information.
Overview of Cash Flows and Liquidity
Following is an overview of our cash flows and liquidity:
Payments for additions to property, plant and equipment
$
(11.0)
$
(7.5)
Proceeds
from sale of property
—
0.1
Cash paid for equity investments
(4.6)
(9.5)
Net cash used in investing activities
$
(15.6)
$
(16.9)
Proceeds
from issuance of long-term debt
$
1,586.5
$
—
Repayment of long-term debt
(1,400.0)
—
Payment for debt issuance costs
(1.2)
—
Net repayments of related-party borrowings
—
(23.6)
Net
(repayments of) proceeds from short-term borrowings
(4.0)
0.1
Net transfers to Former Parent
(31.5)
(9.5)
Proceeds from stock option exercises
1.5
—
Acquisition of noncontrolling interest
(1.9)
—
Other
financing activities
(3.9)
(1.0)
Net cash provided by (used in) financing activities
$
145.5
$
(34.0)
31
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period
as working capital needs and the timing of payments for income taxes, various employee liabilities, restructuring activities, and other items impact reported cash flows.
Cash flows from operating activities were $163.3 million during the three months ended April 2, 2021, an increase of $107.7 million, as compared to the comparable period in 2020. The year-over-year change in operating cash flows was primarily attributable to the following factors:
•Operating cash flows were impacted by higher net earnings during the three months ended April 2, 2021 as compared to the comparable period in 2020. Net earnings for the three months ended April 2, 2021 were impacted by a year-over-year increase
in operating profits of $111.1 million. The year-over-year increase in operating profit was primarily due to an increase in gross profit of $48.7 million as well as a non-cash goodwill impairment charge of $85.3 million recognized during the three months ended March 27, 2020. These factors were partially offset by an increase in Selling, general and administrative expenses of $22.6 million. The goodwill impairment charge was a non-cash expense that decreased earnings without a corresponding impact to the comparable period operating cash flows.
•The aggregate of accounts receivable and long-term financing receivables provided $61.5 million of operating cash flows during the three months ended April 2, 2021 compared to providing $30.5 million in the comparable period of 2020. The amount of cash flow generated
from or used by accounts receivable depends upon how effectively we manage the cash conversion cycle and can be significantly impacted by the timing of collections in a period. Additionally, when we originate certain financing receivables, we assume the financing receivable by decreasing the franchisee’s trade accounts receivable. As a result, originations of certain financing receivables are non-cash transactions.
•The aggregate of other operating assets and liabilities used $18.6 million during the three months ended April 2, 2021 compared to using $71.9 million in the comparable period of 2020. This difference is due primarily to working capital needs and the timing of accruals and payments for compensation and benefits and tax-related amounts.
Investing Activities
Net
cash used in investing activities decreased by $1.3 million during the three months ended April 2, 2021 as compared to the comparable period in 2020 due to a decrease in cash paid for equity investments which was partially offset by an increase in payments for additions to property, plant and equipment.
Financing Activities and Indebtedness
Net cash provided by financing activities increased by $179.5 million during the three months ended April 2, 2021 as compared to the comparable period in 2020 primarily due to the issuance of the $1.6 billion of Notes which was partially offset by the repayment of $1.4 billion of Term Loans.
CRITICAL
ACCOUNTING ESTIMATES
There were no material changes to the Company’s critical accounting estimates described in the Company’s 2020 Annual Report on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Instruments and Risk Management,” in the Company’s
2020 Annual Report on Form 10-K. There were no material changes to this information during the quarter ended April 2, 2021.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of the President and Chief Executive Officer, and the Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of
32
the
period covered by this report. Based on such evaluation, the President and Chief Executive Officer, and the Senior Vice President and Chief Financial Officer, have concluded that, as of the end of such period, these disclosure controls and procedures were effective.
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
PART
II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Vontier is party in the ordinary course of business, and may in the future be involved in, legal proceedings, litigation, claims, and government investigations. Although the results of the legal proceedings, claims, and government investigations in which we are involved cannot be predicted with certainty, we do not believe that the final outcome of these matters is reasonably likely to have a material adverse effect on our business, financial condition, or operating results.
Refer to “Note 9. Litigation And Contingencies – Litigation” of the Consolidated and Combined Condensed Financial Statements in
this Form 10-Q for more information on certain legal proceedings
ITEM 1A. RISK FACTORS
Information regarding risk factors appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Information Related to Forward-Looking Statements,” in Part I - Item 2 of this Form 10-Q and in “Risk Factors” in Part I - Item 1A of our 2020 Annual Report on Form 10-K. There were no material changes during the three months ended April 2, 2021 to the risk factors reported in our 2020 Annual Report on Form 10-K.
Inline XBRL Instance Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
*Indicates management contract or compensatory plan, contract or arrangement
35
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
