Fortive Corp Q3 2025 earnings call

Thank you and thank you everyone for joining us on today's call. I am joined today by Olumide Soroye, Fortive's President and CEO, and Mark Okerstrom, Fortive's CFO. As a reminder, we successfully completed the separation of our Precision Technologies segment, now operating independently as Rallian, on June 28, 2025. Today's call marks Fortive's first quarterly results under our new structure. During today's call we present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. 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 and the subsequent quarterly reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made and we do not assume any obligation to update any forward-looking statements. Our statements on period to period increases or decreases refer to year-over-year comparisons unless otherwise specified. Our results and outlook discussed today are on a continuing operations basis unless otherwise specified. With that, I'll turn the call over to Olumide.

Thank you, Christina. Let me begin on Slide 3 with a few key messages. Q3 was our first quarter as new Fortive. Following our successful spin-off of Rallian, we are now a simpler, more focused company with a clear strategy poised to create meaningful shareholder value. Our Q3 results offer a waypoint along our path towards creating exceptional returns for shareholders in the years ahead. Four highlights I would like to call out. First, our teams are executing very well with laser focus on driving profitable organic growth with the power of our Fortive Business System. This drove solid results ahead of our expectations, including core growth of roughly 2%, adjusted EBITDA growth of 10%, and adjusted EPS growth of 15%. Though we aspire for much better as we continue executing our growth strategy, we were pleased to see acceleration in the business.

Second, we are raising our full year adjusted EPS guidance. We now expect to deliver between $2.63 and $2.67 per share, reflecting our adjusted EPS overperformance in the third quarter, the impact of incremental Q3 buybacks, and our otherwise unchanged view on Q4. Third, we deployed capital in the quarter in accordance with our new approach anchored in delivering the strongest relative returns for shareholders. During the third quarter, we deployed $1 billion to share repurchases, retiring approximately 21 million shares or 6% of our fully diluted share count. Finally, the financial framework we outlined at our June Investor Day remains fully intact and our Fortive Accelerated strategy is now in execution mode. We are focused on delivering benchmark-beating shareholder returns by leveraging FBS to accelerate profitable organic growth, allocating capital intelligently to optimize shareholder returns over the medium to long term, and rebuilding investor trust.

It is early days, but we couldn't be more excited for the road ahead. Before we dive into our Q3 results, let me highlight some examples of the progress we are making in executing our Fortive Accelerated strategy on Slide 4. Our strategy to drive faster organic growth is built around three core levers: innovation acceleration, commercial acceleration, and recurring customer value, all powered by our amplified Fortive Business System and enhanced by our disciplined capital allocation approach. We made meaningful progress in advancing our strategy in Q3, starting with innovation acceleration. Our new product introduction velocity continues to accelerate as a result of our renewed focus on customer-centric innovation. During the quarter, we had several notable product launches, including ServiceChannel's SaaS R2 release, which introduces AI-powered work order insights and streamlined payment solutions. Additionally, Fluke continued its innovation momentum with the Fluke GFL 1500 solar ground fault locator.

This marks a further foray into the high-growth solar operations vertical and increases customer productivity by reducing troubleshooting time and decreasing hazard exposures in the quarter. We also launched a new innovation studio in Nashville, Tennessee, and opened a new customer experience center at ASP's headquarters in Irvine, California. Both properties were built to foster collaboration, accelerate innovation, and deepen customer relationships. Turning to commercial acceleration, we further intensified our commercial focus on faster-growing end markets and regions. Though it is early, we are starting to see green shoots in several areas. In our Intelligent Operating Solutions segment, for example, we have begun to put in place a series of commercial initiatives in North America to enhance our focus and deploy more resources towards high-growth verticals like solar operations, distributed energy, data centers, and defense. We are seeing the early signs of impact in North America Q3 performance.

We also recently stepped up our efforts in South Asia, including India, as our region continues to see exceptional economic growth. We saw significant acceleration in the region across both segments, and we are confident that our enhanced regional presence will drive strong momentum in this high-growth region in the years to come. Moving on to recurring customer value, we remain focused on increasing recurring revenues. Here again, we are early in our journey and have meaningful runway ahead of us. In the quarter, Fluke continued to make great progress on increasing its percentage of recurring revenue through enhancements to our maintenance software and further expansion of our service plan offerings. In general, we saw recurring revenue growth continue to outpace our consolidated growth. Finally, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. Our capital deployment priorities for new Fortive are clear.

Invest in organic growth, pursue accretive bolt-on M&A, return capital through share repurchases, and maintain a modest growing dividend, all with a focus on best relative returns and maximizing medium to long-term shareholder value. Consistent with these priorities, we repurchased about 21 million shares in the third quarter, reflecting our belief in the attractive relative return of share buybacks at the valuations we saw in the quarter. We have also revamped our M&A funnel and process to reflect our different M&A strategy going forward, focused on accretive smaller bolt-on M&A which meet our stringent strategic and financial criteria. With that, I'll turn it over to Mark to walk through our financial results for the third quarter.

Thanks, Olumide. I'll begin with slide five. In the third quarter we delivered total revenue of just over $1 billion, up roughly 2% year-over-year on both a reported and a core basis. While market conditions remain dynamic, we were encouraged to see growth at both iOS and AHS and modest outperformance versus our expectations in both segments. In iOS, resilient customer demand drove better than expected results at both Fluke and our facilities and asset lifecycle software businesses. In AHS, healthcare customers continue to exhibit caution as they navigate recent changes to healthcare reimbursement and funding policy. However, we saw sequential improvement in demand for healthcare equipment and consumables and continued strength in healthcare software. From a geographic perspective, North America showed solid growth, improving sequentially from Q2, driven by strengthening demand trends for professional instrumentation and healthcare equipment.

Europe was down year-over-year and worsened modestly from Q2, driven by weakening macro conditions in the region. Rest of world was mixed. Adjusted gross margin in the quarter was down about 60 basis points, driven by tariff-related costs partially offset by pricing actions and supply chain countermeasures. Adjusted EBITDA was $309 million, up 10% year-over-year with growth accelerating from Q2 levels. Adjusted EBITDA margin expanded approximately 200 basis points to 30%. This strong operational performance was driven by operating leverage alongside deliberate organizational streamlining and an overall sharpened focus on corporate cost discipline. We delivered adjusted EPS of $0.68, up 15% year-over-year, a meaningful acceleration from Q2 driven by growth in adjusted EBITDA, favorable 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 $0.01 headwind to adjusted EPS in the quarter. We generated $266 million of free cash flow in the third quarter and our Q3 trailing twelve month free cash flow grew to $922 million. Our Q3 trailing twelve month free cash flow conversion on adjusted net income remains comfortably north of 100%. Moving to our segment results starting with Intelligent Operating Solutions on slide 6, revenue for the segment grew just over 2.5% on a reported basis with core revenue growth at 2%, slightly ahead of our expectations. Growth was driven by demand for facility and asset lifecycle software, resilient demand for professional instrumentation despite tariff volatility, and strong growth in gas detection products.

At Fluke, we saw an improvement in customer purchasing patterns drive modest growth with particular strength in North America, partially offset by continued softness in Europe related to macro conditions. While the acceleration is encouraging, ongoing volatility in global trade policy remains a source of uncertainty. Our facilities and asset lifecycle software businesses performed modestly ahead of expectations, supported by strong demand for multi-site facility maintenance and marketplace software in North America. However, tighter fiscal policy and constrained funding continue to pressure government demand for our procurement and estimating solutions. Our gas detection business is growing nicely with strong demand for our hardware as a service model to ensure worker safety, with particular strength in North America and Latin America.

Adjusted gross margin in the segment declined by just over 90 basis points year-over-year to 65.7%, primarily due to tariff cost pressures, partially offset by pricing and supply chain countermeasures. Adjusted EBITDA grew 7% to $242 million, accelerating from the more modest growth we saw in Q2, driven by operating leverage and reduced costs associated with flattening and rationalizing segment-level organizational structures. Adjusted EBITDA margin grew to 34.6%, up from 33.3% in the prior year period. Moving to our Advanced Healthcare Solutions segment on slide 7, we delivered total revenue of $328 million. Revenue grew approximately 2% year-over-year, just over 1% on a core basis. As we noted last quarter, we continued to see reimbursement and funding policy changes impact the AHS segment, specifically the deferral of U.S.-based hospital capital expenditures on healthcare equipment.

However, demand trends in North America improved from Q2 levels, driving sequential improvement in capital performance as some customers executed on deferred orders for sterilization and biomedical test equipment consumables. Demand also improved sequentially across most regions. Encouragingly, our software products in the segment continue to deliver solid growth, fueled by strong execution and structural advantages from resilient SaaS-based revenue models. Our adjusted gross margin of 58.4% in the AHS segment was similar to last year. Adjusted EBITDA grew approximately 7% year-over-year. Adjusted EBITDA margin expanded from roughly 27%-28%, driven by operating leverage, flattened organizational structures, partially offset by modest incremental R&D investments.

Turning to Slide 8, as noted earlier, we deployed just over $1 billion of capital to share repurchases in the third quarter, reflecting confidence in our ability to deliver on the core value creation plan represented by our Fortive Accelerated strategy and the attractive valuations we saw in the quarter. We funded these repurchases with a combination of the remaining proceeds from the Rallian spin-off, dividend cash on hand, and increased commercial paper issuance in anticipation of continued strong free cash flow generation in the quarters ahead. As previously highlighted, our free cash flow on a trailing twelve month basis was $922 million. Moving to Slide 9, we are raising our full year adjusted EPS guidance to $2.63-$2.67 per share.

Our guidance reflects Q3 results ahead of our expectations, the impact of incremental buybacks in Q3, and otherwise no change to the view we held on Q4 as at our last earnings call. This outlook also assumes a continuation of the market dynamics we experienced as we exited Q3. It also reflects current or known future tariff rates expected to go into effect through the end of the year, with tariffs net of countermeasures not expected to be material in the quarter. Let me provide a few additional modeling considerations based on what we see today. We are expecting overall core growth to moderate in Q4, with AHS core growth broadly in line with Q3 levels and very modest core growth at iOS.

We continue to expect a full year adjusted effective tax rate in the mid-teens and a Q4 tax rate in the single digits due to discrete tax items in the quarter. We also expect a sequential increase in net interest expense in Q4, reflecting our cash and debt levels at quarter end. As a final note before turning it back to Olumide for closing remarks and Q&A, in our first quarter post spin-off, we took important first steps to demonstrate our steadfast commitment to unrelenting execution on the Fortive Accelerated three pillar Value Creation plan that we outlined at our June Investor Day. We have much work left to do, but change is underway and we are energized by the exciting work ahead of us. I'll now turn it back over to Olumide.

Thanks, Mark. I'll close out our prepared remarks with a few reflections from my first quarter as CEO and offer a bit more color on the changes we have catalyzed at Fortive in the past hundred days. First, our thesis behind the creation of new Fortive as a simpler, more focused company is showing promising early outcomes. We are seeing the benefits of simplification in our day-to-day operations, enabling us to be notably more customer centric. With fewer operating brands, we've been able to simplify our organizational model and processes. That is freeing up more time across our team to focus on the source of growth, our customers. Personally, I have really enjoyed spending significantly more time with our customers across both segments as we deepen relationships and uncover additional opportunities to accelerate growth.

We have also flattened out our executive leadership team to ensure that business leaders in closest proximity to our customers have a stronger voice at the top of our company. With 100,000 customers across our portfolio, I am energized by the impact our enhanced customer centric approach will have on our growth trajectory. Second, we are taking deliberate steps to accelerate growth. We are giving our 10 operating brands more growth oxygen and encouraging them to freely and frequently surface the next best organic growth opportunity that may have been underexploited in the past. We have transformed our strategic planning process into a more aggressive growth focus engine, and we are emerging from our recent strategic planning cycle with a robust pipeline of investable growth opportunities. We are re-gearing our annual financial planning, forecasting, and governance processes to enable in-year reinvestment into growth as overperformance materializes.

Third, our Fortive Business System is powerful not just for leadership and lean, but as a systematic growth engine. We are making great progress in evolving the mindset, cadence, and tools of FBS to better support growth, not just by integrating our AI Center of Excellence directly into our FBS team, but also by evolving and enhancing existing tool sets and best practices around innovation, commercial acceleration, and creating recurring customer value. Finally, our new approach to capital allocation is very different from what it was in the past. Our dynamic and disciplined capital allocation approach has one singular purpose: maximizing medium to long term shareholder returns, and we have demonstrated our commitment to this approach in our first quarter as new Fortive. We are pleased with our results this quarter, but we are not satisfied.

We are driving hard towards our ambitious agenda and look forward to demonstrating continued and accelerated progress in the quarters and years ahead. Thank you for your continued interest in Fortive. I especially want to thank our shareholders, our 100,000 customers, and all our Fortive employees around the world who do a tremendous job every day to deliver strong results and build enduring advantages in our businesses. With that, I'll turn it to Christina for Q and A.

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