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 endedDecember 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 theSecurities 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 ofthe 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: â¢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. â¢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. â¢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. â¢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. â¢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. â¢International economic, political, legal, compliance, epidemic and business factors could negatively affect our financial statements. â¢We may be required to recognize impairment charges for our goodwill and other intangible assets. â¢We are party to asbestos-related product litigation that could adversely affect our financial condition, results of operations and cash flows. â¢Our restructuring actions could have long-term adverse effects on our business. â¢Our defined benefit pension plans are subject to financial market risks that could adversely affect our financial statements. 29 -------------------------------------------------------------------------------- â¢As of the date of this quarterly report, we have outstanding indebtedness of approximately$2.0 billion and the ability to incur an additional$600.0 million of indebtedness under the two-year senior unsecured delayed-draw term loan and$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. â¢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. â¢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. â¢Our acquisition of businesses, investments, joint ventures and other strategic relationships could negatively impact our financial statements. â¢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. â¢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. â¢Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations. â¢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. â¢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. â¢If there is a determination that the distribution, together with certain related transactions, is taxable forU.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying Fortive's private letter ruling from theIRS or tax opinion are incorrect or for any other reason, then Fortive and its stockholders could incur significantU.S. federal income tax liabilities, and we could also incur significant liabilities. â¢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. â¢Fortive may compete with us. â¢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 GeneralVontier 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. 30 -------------------------------------------------------------------------------- Our research and development, manufacturing, sales, distribution, service and administrative operations are located in more than 30 countries acrossNorth America ,Asia Pacific ,Europe andLatin 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 includeEastern Europe , theMiddle East ,Africa ,Latin America , andAsia , with the exception ofJapan andAustralia . 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 and six months endedJuly 2, 2021 . As compared to the comparable periods of 2020, aggregate year-over-year total sales increased 35.8% and 25.3% for the three and six months endedJuly 2, 2021 . Sales from existing businesses increased 32.7% and 22.8% during the three and six months endedJuly 2, 2021 , as compared to the comparable periods in 2020. The increase in total sales and sales from existing businesses during the three and six months endedJuly 2, 2021 was primarily driven by broad growth across the portfolio as well as the direct and indirect impacts of COVID-19 on the prior year comparable periods. Our mobility technologies platform had strong demand for retail and environmental solutions, continued strong demand for and shipments of fuel management systems inNorth America related to the enhanced credit card security requirements for outdoor payment systems based on the Europay, Mastercard andVisa ("EMV") global standards,Mexico regulatory demand and dispenser and environmental deliveries inIndia . Our diagnostics and repair portfolio also experienced strong demand across most product categories, most notably specialty and hardline tools, tool storage and diagnostics. Changes in foreign currency exchange rates positively impacted our sales growth by 3.1% and 2.5% during the three and six months endedJuly 2, 2021 compared to the comparable periods in 2020. In developed markets, year-over-year total sales and sales from existing businesses for the three months endedJuly 2, 2021 increased at a rate greater than 30% which was primarily due to growth inNorth America which also grew more than 30%. High growth markets had a more than 20% increase primarily due to growth inIndia andLatin America . In developed markets, year-over-year total sales and sales from existing businesses for the six months endedJuly 2, 2021 increased more than 20% which was primarily due to more than 20% growth inNorth America . High growth markets also had a more than 20% increase primarily due to growth inIndia andLatin America . Outlook We expect overall sales and sales from existing businesses to grow on a year-over-year basis in 2021; however, we are continuing to monitor the impact of the COVID-19 pandemic and geopolitical and regulatory uncertainties and the corresponding impact to our businesses in addition to the other factors identified above in "Information Relating to Forward- Looking Statements."
RESULTS OF OPERATIONS
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Comparison of the results of operations
Three Months Ended Six Months Ended ($ in millions) July 2, 2021 June 26, 2020 July 2, 2021 June 26, 2020 Total sales$ 724.6 $ 533.7 $ 1,432.0 $ 1,142.9 Total cost of sales (406.1) (302.7) (801.7) (648.8) Gross profit 318.5 231.0 630.3 494.1 Operating costs: Selling, general and administrative expenses ("SG&A") (164.6) (111.8) (310.3) (234.9) Research and development expenses ("R&D") (32.9) (29.2) (66.1) (62.1) Impairment of goodwill - - - (85.3) Operating profit$ 121.0 $ 90.0 $ 253.9 $ 111.8 Gross profit as a % of sales 44.0 % 43.3 % 44.0 % 43.2 % SG&A as a % of sales 22.7 % 20.9 % 21.7 % 20.6 % R&D as a % of sales 4.5 % 5.5 % 4.6 % 5.4 % Operating profit as a % of sales 16.7 % 16.9 % 17.7 % 9.8 % Components of Sales Growth % Change Three Months % Change Six Months Ended July 2, 2021 vs. Ended July 2, 2021 vs. Comparable 2020 Period Comparable 2020 Period Total revenue growth (GAAP) 35.8 % 25.3 % Existing businesses (Non-GAAP) 32.7 % 22.8 % Currency exchange rates (Non-GAAP) 3.1 % 2.5 % Total sales and sales from existing businesses within our mobility technologies platform increased more than 20% during the three months endedJuly 2, 2021 as compared to the comparable period of 2020. Total sales and sales from existing businesses within our mobility technologies platform increased more than 20% and at a rate in the high-teens, respectively, during the six months endedJuly 2, 2021 as compared to the comparable period of 2020. Our mobility technologies platform increases were driven by the direct and indirect impacts of COVID-19 on the prior year comparable periods as well as strong demand for retail and environmental solutions, continued strong demand for and shipments of fuel management systems inNorth 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 inIndia . Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased more than 50% during the three months endedJuly 2, 2021 as compared to the comparable period in 2020. Total sales and sales from existing businesses within our diagnostics and repair technologies platform increased more than 30% during the six months endedJuly 2, 2021 as compared to the comparable period in 2020. The year-over-year results during both periods endedJuly 2, 2021 were driven principally by the direct and indirect impacts of COVID-19 on the prior year comparable periods as well as strong demand across most product categories, most notably specialty and hardline tools, tool storage and diagnostics. Price increases are reflected as a component of the change in sales from existing businesses, and year-over-year price increases contributed 2.0% and 1.5% to sales growth during the three and six months endedJuly 2, 2021 versus the comparable periods in 2020. 32 --------------------------------------------------------------------------------
Cost of sales
Cost of sales increased$103.4 million and$152.9 million for the three and six months endedJuly 2, 2021 , as compared to the comparable periods 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 and six months endedJuly 2, 2021 , as compared to the comparable periods in 2020, is primarily due to higher sales volumes and a favorable sales mix which was partially offset by increased costs of materials due to inflationary pressures. The 70 basis point increase in gross profit margin during the three months endedJuly 2, 2021 as compared to the comparable period in 2020 is primarily due to price increases and a favorable sales mix and partially offset by increased costs of materials due to inflationary pressures. The 80 basis point increase in gross profit margin during the six months endedJuly 2, 2021 as compared to the comparable period in 2020 is primarily due to price increases and a favorable sales mix and partially offset by increased costs of materials due to inflationary pressures.
Operating and other expenses
SG&A expenses increased during the three and six months endedJuly 2, 2021 , as compared to the comparable periods in 2020, primarily due to the increase of corporate costs associated with operating as a separate public company as well as savings in the three and six months endedJune 26, 2020 from broad cost reduction efforts that reduced labor expenses to better align with reductions in demand as well as other reductions in discretionary spending. On a year-over-year basis, SG&A expenses as a percentage of sales increased 180 and 110 basis points during the three and six months endedJuly 2, 2021 , respectively, as compared to the comparable periods in 2020 primarily due to the increase of corporate costs associated with operating as a separate public company as well as broad cost reduction efforts in the three and six months endedJune 26, 2020 . R&D expenses (consisting principally of internal and contract engineering personnel costs) increased$3.7 million and$4.0 million during the three and six months endedJuly 2, 2021 , as compared to the comparable periods in 2020 due to broad cost reduction efforts in the prior year periods. On a year-over-year basis, R&D expenses as a percentage of sales decreased during the three and six months endedJuly 2, 2021 due to an increase in total sales which was partially offset by an increase in R&D expenses.
Operating profit
Operating profit margin decreased by 20 basis points in the three months ended
Year-over-year operating profit margin comparisons were favorably influenced by:
â¢Higher year-over-year sales volumes, price increases and a favorable sales mix - favorable 960 basis points Year-over-year operating profit margin comparisons were primarily impacted by the following unfavorable factors: â¢Corporate costs associated with operating as a separate public company and other one-time costs - unfavorable 540 basis points â¢Increased operating costs due to prior year broad cost reduction efforts and other increases in operating costs - unfavorable 340 basis points â¢Increased costs of materials due to inflationary pressures - unfavorable 100 basis points 33 --------------------------------------------------------------------------------
Operating profit margin increased by 790 basis points in the end of the six-month period
Year-over-year operating profit margin comparisons were favorably influenced by:
â¢Higher year-over-year sales volumes, price increases and a favorable sales mix - favorable 880 basis points â¢The impact of the prior year goodwill impairment of our Telematics business - favorable 600 basis points Year-over-year operating profit margin comparisons were primarily impacted by the following unfavorable factors: â¢Corporate costs associated with operating as a separate public company and other one-time costs - unfavorable 440 basis points â¢Increased operating costs due to prior year broad cost reduction efforts and other increases in operating costs - unfavorable 180 basis points â¢Increased costs of materials due to inflationary pressures - unfavorable 70 basis points NON-GAAP FINANCIAL MEASURES
Sales of 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. â¢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. â¢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. â¢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 by existing firms should be viewed as a complement, not a replacement or superiority, to total sales, and may not be comparable to measures of the same title reported by other firms.
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. 34 --------------------------------------------------------------------------------
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 consolidatedU.S. federal and certain state income tax returns, as well as certain non-U.S. returns. For periods prior to the Separation, our combined financial statements reflect income tax expense and deferred tax balances as if we had filed tax returns on a standalone basis separate from Fortive. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer and a standalone enterprise for the periods prior to the Separation. For periods prior to the Separation, our pretax operating results include any transactions with Fortive as if it were an unrelated party. In connection with the Separation, we entered into agreements with Fortive, including a Tax Matters Agreement. The Tax Matters Agreement distinguishes between the treatment of tax matters for "joint" filings compared to "separate" filings prior to the Separation. "Joint" filings are returns, such asthe United States federal return, that include operations from both Fortive legal entities and the Company. By contrast, "separate" filings are tax returns (primarilyU.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. OnMarch 27, 2020 , theU.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 inthe 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 initialU.S. federal taxable yearOctober 9, 2020 throughDecember 31, 2020 ; (ii) separate company state tax returns for all periods; (iii) joint state tax returns for the periodOctober 9, 2020 throughDecember 31, 2020 ; (iv) international separate company returns for all periods; and (v) joint international tax returns that include onlyVontier 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 toU.S. tax law, the Company's initialU.S. federal income tax return is for the short taxable yearOctober 9, 2020 throughDecember 31, 2020 . We expect to file our initialU.S. federal income tax return for the 2020 short tax year with the Internal Revenue Service ("IRS") during 2021. Therefore, theIRS has not yet begun examination of the Company. The Company remains subject to tax audit for its separate company tax returns in variousU.S. states for the tax years 2011 to 2020. Our operations in certain foreign jurisdictions remain subject to routine examination for the tax years 2007 to 2020.
Comparison of the completed three and six months
Our effective tax rate for the three and six months endedJuly 2, 2021 was 24.4% and 24.0%, respectively, as compared to 23.7% and 42.1% for the three and six months endedJune 26, 2020 , respectively. The year-over-year increase in the effective tax rate for the three months endedJuly 2, 2021 as compared to the comparable period in the prior year was primarily due to an increase inU.S. state tax expense. The year-over-year decrease in the effective tax rate for the six months endedJuly 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 six months endedJune 26, 2020 . 35 -------------------------------------------------------------------------------- Our effective tax rate for both periods in 2021 and 2020 differs from theU.S. federal statutory rate of 21% due primarily to the effect of state taxes and foreign taxable earnings at a rate different from theU.S. federal statutory rate. Specific to the six months endedJune 26, 2020 , there was an unfavorable impact related to a non-deductible book goodwill impairment. COMPREHENSIVE INCOME Comprehensive income decreased by$6.8 million during the three months endedJuly 2, 2021 as compared to the comparable period in 2020 due primarily to unfavorable changes in foreign currency adjustments of$20.6 million which were partially offset by net earnings that were higher by$13.9 million . Comprehensive income increased by$117.3 million during the six months endedJuly 2, 2021 as compared to the comparable period in 2020 due primarily to net earnings that were higher by$109.1 million and favorable changes in foreign currency translation adjustments of$9.9 million . LIQUIDITY AND CAPITAL RESOURCES Prior to the Separation, we were dependent upon Fortive for all our working capital and financing requirements under Fortive's centralized approach to cash management and financing of operations of its subsidiaries. With the exception of cash, cash equivalents and borrowings clearly associated withVontier 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 six months endedJuly 2, 2021 , we completed the following financing and capital transactions: â¢OnMarch 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, byGilbarco Inc. andMatco Tools Corporation , two of our wholly-owned subsidiaries (the "Guarantors"). Interest on the Notes is payable semi-annually in arrears onApril 1 andOctober 1 of each year, commencing onOctober 1, 2021 . The Notes and the Guarantees are the Company's and the Guarantors' general senior unsecured obligations. â¢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. â¢OnApril 28, 2021 , we refinanced our Three-Year Term Loans and Revolving Credit Facility which extended the maturities and lowered the interest rates, among certain other changes. Our long-term debt requires, among others, that we maintain certain financial covenants, and we were in compliance with all of these covenants as ofJuly 2, 2021 . Refer also to Note 4. Financing to the Consolidated and Combined Condensed Financial Statements for additional information. 36
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