Fortive Corp Q2 2025 earnings call

Thank you and thank you everyone for joining us on today's call. I am joined today by Olumide Soroye, our President and CEO, and Mark Okerstrom, our CFO. Today's call will begin with a brief overview of our consolidated Q2 results which include the results of our Precision Technologies segment. The remainder of our remarks will focus on Fortive's continuing operations following the successful separation of the Precision Technologies business, now Ralliant, which was completed on June 28th, 2025. Please note that we will defer any questions related to Precision Technologies to the Ralliant team who will hold their earnings call on August 12th, 2025. During today's call we will present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. Our statements on period to period increases or decreases refer to year-over-year comparisons unless otherwise specified.

We will also make forward-looking statements including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and actual results might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available in our SEC filings including our Annual Report on Form 10-K for the year ended December 31st, 2024 and Quarterly Reports on Form 10-Q for the quarters ended March 28th, 2025 and June 27th, 2025. These forward-looking statements speak only as of the date they are made and we do not assume any obligation to update any forward-looking statements. With that, I'll turn the call over to Olumide.

Thank you, Christina. Let me begin on slide 3 with a few key messages. First, this was a pivotal quarter for Fortive. We successfully completed a spin-off of Ralliant on June 28th and we've emerged as a simpler, more focused company well positioned to deliver durable and accelerated financial performance. In our final quarter as a consolidated company, we delivered adjusted EPS of $0.90 at the high end of our guidance range with 8% growth in trailing twelve months adjusted free cash flow for new Fortive on a continuing operations basis. Our Q2 earnings and free cash flow results demonstrated resiliency. We delivered adjusted EPS of $0.58 and 14% growth in trailing twelve months free cash flow despite customer demand pressures in the second half of June stemming from tariff uncertainty, constrained government spending, and evolving healthcare policy dynamics as previewed in our June 30th Ralliant spin completion press release.

Today, we are also initiating guidance for Fortive's continuing operations reflecting our full year outlook and consistent with our new Fortive approach of providing clear and simplified guidance and disclosure. Finally, we remain focused on executing our Fortive PACS-related strategy introduced at our Investor Day seven weeks ago and designed to drive faster profitable growth and strong shareholder value creation over the medium term. We couldn't be more confident and excited for the road ahead. Touching briefly on slide 4, which covers our final quarter of consolidated results including the Precision Technology segment, now Ralliant, we delivered Q2 adjusted EPS of $0.90 at the high end of our guidance range and generated approximately $300 million in adjusted free cash flow on a trailing twelve month basis. Our free cash flow grew 8% and free cash flow conversion on adjusted net income was 105%.

We deployed approximately $140 million towards share repurchases during the quarter. From the time of the spin announcement in September 2024 through completion in June 2025, we allocated over 75% of our consolidated free cash flow to share repurchases, consistent with our previously communicated guidance about capital deployment during the period. Finally, we completed a spin-off of Ralliant ahead of our original timeline, a testament to the power of Fortive Business System-driven execution and the talent and dedication of our teams around the world. From this point on, all figures and comments will refer to Fortive's continuing operations excluding the results of the Precision Technologies segment. Let's move to Slide 5 with the completion of the spin. MU40 begins in Q3 as a simplified and focused company with a track record of strong, durable financial performance fortified by our 50% recurring revenues as shown on this slide.

We begin this next chapter with an attractive financial profile and track record, having delivered 4% compounded annual core revenue growth over the past five years with solid growth every year since the global pandemic in 2020. Each of our two reporting segments have been key contributors to this performance and are poised for acceleration powered by our Fortive Accelerated Strategy. Before we dive into the details of Q2 results, let me highlight some examples of exciting progress our team made in the quarter in executing our 14 Accelerated Strategy on Slide 6. Our strategy is built around three core levers for profitable organic growth acceleration, innovation acceleration, commercial acceleration and recurring customer value, all powered by our amplified Fortive Business System. Our new disciplined capital allocation approach seeks to enhance this organic result with maximizing medium term equity returns as our North Star.

We made meaningful strides in advancing key elements of this strategy in Q2. Starting with innovation acceleration, Fluke continues to execute an exciting market leading innovation fund. For example, Fluke's 1670 Series multifunction installation tester with TrueTest software, Fluke Connect and wireless connectivity was named Most Valuable Product in Control Engineering's 2025 Product of the Year awards. At Gordian, we're seeing strong adoption of a new cloud-based assessment and capital planning module driving double-digit orders growth in that product category. Moving to commercial acceleration, our Latin America growth strategy continues to run, delivering double-digit Q2 growth in the IOS segment in the region. At Fluke we saw high single-digit growth in our priority high growth applications including distributed energy and data centers with exciting runway ahead of us closing with recurring customer value.

Our journey at Fluke to increase recurring revenue continued with double-digit ARR growth in the quarter and we are undertaking AI-enabled customer experience improvements across our portfolio, driving better net dollar retention and customer lifetime value. As an example, Provision launched AI assistance and intelligent automation to drive productivity in key healthcare workflows. All our organic growth acceleration levers are enabled by our amplified Fortive Business System, which is at the heart of our culture. In May, nearly 1,000 team members around the world participated in our President's Kaizen Week, tackling growth opportunities with a continuous improvement mindset. It's one of my favorite weeks of the year and I was particularly inspired by the pervasive deployment of AI capabilities for impact across our 34 Kaizen teams and our team's energy around amplifying FBS for profitable growth. Finally, disciplined capital allocation is an integral component of our Fortive accelerated strategy.

At our June Investor Day, we outlined our capital allocation priorities to enhance shareholder returns, invest in organic growth, pursue accretive bolt-on M&A, deploy capital to share repurchases, and maintain a growing dividend. Aligned with these priorities, we are activating our bolt-on M&A engine and we are applying a rigorous, disciplined approach based on relative returns to evaluate yields. We are ready to execute attractive bolt-on opportunities with the goal of enhancing shareholder returns. Looking ahead, the future is bright for Fortive. We are emerging from the spin-off as a more durable and resilient company with a clear plan to accelerate shareholder value creation through profitable organic growth, disciplined capital allocation, and a deliberate focus on building and maintaining investor trust. We have rock-solid confidence in the quality of our new Fortive portfolio, purpose-built in and a Fortive accuracy strategy shared at our Investor Day seven weeks ago.

Notwithstanding fluctuations in specific quarterly metrics, our teams are energized, empowered, and excited to lead Fortive into this next chapter. I have been spending time with several of our customers and they are thrilled about our new Fortive direction and eager to be part of our innovation acceleration, commercial acceleration, and recurring customer value agenda. With that, I'll turn it over to Mark to walk us through the financial results for Q2, our last quarter before the launch of new Fortive.

Thanks Olumide. I'll begin with slide 7. In the second quarter we delivered total revenue of just over $1 billion, down 0.4% year-over-year. On a core basis, revenue declined 0.7%. Q2 revenue growth for the company was negatively impacted late in the quarter by customer demand, responses to macro pressures and uncertainty, which Olumide mentioned earlier and on which I will elaborate in more detail as I go through our segment results. Across the first 10 weeks of the quarter we saw a continuation of the revenue growth trends we saw in Q1. However, as June progressed we saw year-over-year growth turn negative in the last few weeks and we finished the month approximately $30 million below our expectations, driving year-over-year revenue growth on our $1 billion quarterly revenue base into decline territory. Although it's early, July is looking better.

Aside from these end of quarter factors, the business performed broadly in line with our expectations. From a geographic perspective, North America was slightly positive but less so than what we had anticipated largely due to the end of quarter factors. Western Europe, China and Latin America were down year-over-year. We delivered adjusted gross profit of $650 million, similar to last year. Adjusted gross margins were also roughly flat year-over-year as FBS driven pricing actions, growth in higher margin recurring revenues and lower cost from supply chain countermeasures were roughly offset by tariff related cost pressures. Adjusted EBITDA was $288 million in line with Q2 of last year with adjusted EBITDA margins holding steady versus the prior year.

We delivered adjusted EPS of $0.58, up 4% year-over-year driven by stable year-over-year adjusted EBITDA coupled with lower interest expense on lower debt balances and the positive year-over-year impact of share repurchases. We estimate direct tariff costs net of countermeasures created a roughly $0.02 headwind to EPS in the quarter. This excludes the tariff related quarter end demand pressure referenced earlier. We generated $180 million of free cash flow in the second quarter with our Q2 trailing 12 month free cash flow of $939 million representing a solid 14% year-over-year increase. Our Q2 trailing 12 month free cash flow conversion on adjusted net income was 107%. Moving to our segment results, starting with Intelligent Operating Solutions on slide 8, both revenue and core revenue growth were essentially flat year over year, which was below our expectations.

The back half of June year-over-year growth turned negative, driven by two primary factors. First, general tariff uncertainty and questions around the permanence of tariff-related pricing and surcharge changes resulted in what we believe was deferred, not canceled, customer spending on certain categories of professional instrumentation at Fluke. While overall orders grew in the quarter, the mix of orders, particularly in the final weeks, shifted to longer lead time products, resulting in an increase in backlog and a shortfall in revenue. We expect to deliver most of the backlog over the course of the second half of the year. We are seeing encouraging signs in July that order mix is normalizing, which would suggest that most of the Q2 revenue slip will come back to us in the next several quarters. Secondly, constrained U.S.

government spending and fiscal tightening at state and local governments pressured take rate procurement revenue at Gordian. Gordian usually sees a spike in spending in the last few weeks of Q2 as government entities with the June fiscal year end rush to use their remaining budgets. Our customer discussions suggest that overall concerns about go-forward funding more broadly created a chilling effect on the usual use it or lose it behavior. Absent the above factors impacting Fluke and Gordian, the quarter would have come in broadly in line with our expectations. As always, there were puts and takes, but we've been pleased with the growth we've seen at Industrial Scientific and the iOS software businesses year-to-date. Adjusted gross profit came in at $461 million, down slightly from prior year.

Adjusted gross margins declined to 66.1% from just under 70% a year ago, primarily due to tariff cost pressures partially offset by pricing countermeasures and growth from our higher margin software businesses. Despite the slight revenue and gross profit declines in the segment, adjusted EBITDA grew 2% to $236 million as lower operating costs more than offset the modest decline in gross profit. Adjusted EBITDA margins grew to 33.8%, up from 33.3% in the prior year period. Moving to our Advanced Healthcare Solutions segment on slide 9, we delivered total revenue of $320 million, which was below our expectations. Revenue was down 1.3% year-over-year and down 1.9% on a core basis. Towards the end of Q2 we saw reimbursement policy changes and uncertainty impact the Advanced Healthcare Solutions segment.

Specifically, we saw the deferral of U.S.-based hospital capital expenditures on healthcare equipment including sterilization machines at ASP and quality assurance devices at Fluke Health with customers citing precautionary deferral of spending while they sort through the impact of reimbursement policy changes. We saw partially offsetting outperformance in other parts of the business with our AHS software businesses outperforming on strong execution and benefiting from resilient SaaS-based revenue models. Absent the end of quarter pullback in healthcare equipment spending, AHS in total would have grown revenue largely in line with our expectations. Despite revenue being down year-over-year, adjusted gross profit was up slightly. Adjusted gross margins were up from just under 58% last year to just over 59% with favorable pricing contribution aided by a mix shift into higher margin AHS software revenue away from lower margin hardware revenue.

Adjusted EBITDA was flat year-over-year at $86 million as we reinvested very modest gross profit dollar growth into R&D, sales, and marketing initiative to drive our top line acceleration agenda outlined by Illuminay. Despite these investments and declining revenue, adjusted EBITDA margin expanded modestly from 26.6%-26.9%. Moving to slide 10 for a brief update on tariffs which had shifted meaningfully since our Q1 earnings call. Based on current tariff rates in effect or expected to go into effect, we now expect the gross tariff impact for Fortive continuing operations to be approximately $40 million-$55 million in the second half of 2025 and $80 million-$120 million on an annualized basis. The majority of this impact is related to U.S.-China tariffs.

While the global trade environment remains volatile and that volatility is impacting our results on the margin, we are actively leveraging the Fortive Business System to adapt and respond. Our countermeasures include pricing actions and surcharges, shifts in our global supply chain, the manufacturing footprint, and incremental cost and productivity initiatives. Assuming tariff conditions continue along the path of what is known today, we expect gross tariffs to be mitigated fully by the fourth quarter, and we expect we will see a modest gross margin and EPS headwind in Q3 as our countermeasures continue to fully phase in. Should global trade and fiscal policy remain as volatile as it has recently been, we would expect to continue to see near term revenue impacts and challenges with revenue visibility of the type we saw in Q2.

Turning to slide 11, we received a $1.15 billion dividend for the Ralliant spin-off, which is reflected in the Fortive Continuing Operations balance sheet. In our earnings release in July, we used approximately $725 million of proceeds from the dividend to pay down debt comprised of the entirety of our Japanese yen and Euro denominated term debt and a portion of our 2026 Euro bonds. We plan to use the remaining dividend proceeds for share repurchases. The balance sheet figures shown here represent Fortive Continuing Operations on a pro forma basis reflecting the debt paydown. From a leverage standpoint, our gross leverage ratio is roughly 2.5x adjusted EBITDA after these debt repayments, in line with our stated target. As previously highlighted, on a trailing twelve month basis, we generated roughly $940 million of annual free cash flow.

This, plus our strong balance sheet and growing adjusted EBITDA, gives us ample capacity and flexibility to execute our capital deployment priorities, always with a disciplined focus on allocating capital based on best relative risk adjusted returns from a shareholder's perspective. Moving to slide 12, we are initiating our full year adjusted EPS guidance for new Fortive at $2.50-$2.60 per share. This outlook assumes a continuation of the market dynamics we experienced in Q2. We are not forecasting any material improvement or deterioration. It reflects the expected net impact of tariffs based on currently announced rates. Now let me provide a few additional modeling considerations from a phasing perspective. We expect Q3 reported revenue to be broadly similar to Q4, including a modest tailwind from FX. We are modeling second half core revenue growth broadly in the range of the core growth we saw in the first half.

We also expect AHS core growth in the second half to be similar to Q2, with a more challenging year-over-year comparable in Q3. From an adjusted EBITDA perspective, we expect typical seasonality with Q3 adjusted EBITDA lower than Q2 on a dollar basis. As a reminder, with lower debt balances our interest expense will be lower in the second half. We continue to expect a full year adjusted effective tax rate in the mid teens; however, we are modeling Q3's tax rate in the high teens and the Q4 tax rate in the single digits due to discrete tax items in the quarter.

Thanks, Mark. Let me close our prepared remarks on slide 13 with a few reflections on what's ahead for Fortive. First, we have a long track record of strong annual financial performance as presented on this page, solid revenue growth, expanding EBITDA margins, and resilient free cash flow in the last five years. Q2 2025 was our last quarter before the launch of New Fortive. While core growth in the quarter was below our expectations, our earnings and free cash flow stood up well in the face of unexpected headwinds. We delivered 4% adjusted EPS growth and 14% trailing twelve months free cash flow growth. This is a testament to our team, the operating leverage and cash generation strengths in our business, and the Fortive Business System. We are excited about what that portends as we return to normal and accelerating growth.

With Q2 and the spin behind us, we now enter the era of Fortive Accelerated. Our purpose-built New Fortive team is excited about the opportunity ahead of us, and we thank you all for your interest in Fortive. I especially want to thank our investors, our 100,000 customers, and all our Fortive employees around the world across our ten iconic operating brands who do a tremendous job every day to deliver near-term results and build enduring advantages in our businesses. With that, I'll turn it to Christina for Q&A.

Thanks Olumide. That concludes our prepared remarks. We are now ready for questions.