Fortive Corp Q4 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. During today's call, we present certain non-GAAP financial measures. Information required by Regulation G is available on the investor 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-K.

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, and our results and outlook discussed today are on a continuing operations basis. With that, I'll turn the call over to Olumide.

Thank you, Christina. Let me begin on slide three. Q4 was another quarter of solid execution by our new Fortive team. With the first two quarters of performance now behind us and our 2026 strategic and financial plans firmly in place, our strong conviction in the road ahead continues to build. In July, we began our journey as New Fortive, united by one mission, aligned around two segments, serving attractive end markets with strong circular tailwinds, and guided by a clear strategy with three pillars: accelerate profitable organic growth, allocate capital with discipline, and build and maintain investor trust, all with the goal of delivering benchmark-beating shareholder returns in the years ahead. Our Q3 and Q4 results reinforce our conviction in this path. While we are still early in the journey, we are diligently executing the Fortive Accelerated Strategy and sustaining the operational rigor that Fortive is known for.

We enter 2026 with optimism, enthusiasm, and an unrelenting focus on execution. I have five key messages to cover today. First, our teams continue to execute well with the power of our Fortive Business System, driving solid Q4 results ahead of our expectations. In Q4, we delivered Core Growth of just over 3%, Adjusted EBITDA growth of 8%, and Adjusted EPS growth of about 13%. We were pleased to see another quarter of growth acceleration in the business, knowing that we have even more growth upside ahead of us. Second, our strong Q4 earnings performance resulted in full-year Adjusted EPS of $2.71, exceeding the high end of our guidance range of $2.63-$2.67.

Third, we continue to deploy capital in accordance with our disciplined approach, anchored in optimizing shareholder returns over the medium to long term. In the fourth quarter, we executed an additional $265 million of share repurchases, bringing total second-half repurchases to $1.3 billion. Fourth, we are diligently progressing our Fortive Accelerated Strategy to deliver benchmark-beating shareholder returns. I'll spend a few minutes on this in the next slide. Finally, as we turn our focus to 2026, we are initiating full-year 2026 Adjusted EPS guidance of $2.90-$3, representing approximately 9% year-over-year growth at the midpoint. Moving to slide four. Before we turn to our Q4 results, I'd like to highlight the progress we've made on each of the three Fortive accelerated pillars, beginning with our focus on driving faster, profitable organic growth.

In terms of innovation acceleration, this quarter, we continued to accelerate new product introduction velocity, including offerings aimed at high-growth verticals. At Fluke, we launched a new data center testing solution, CertiFiber Max, with the fastest throughput in the industry, helping customers test and validate complex fiber systems quickly and accurately. At ServiceChannel, our third major product release of the year went live in Q4. This release enhances maintenance, professional onboarding, work order visibility, compliance, and payment efficiency. On the commercial front, we continue to intensify our focus on faster-growing end markets and regions where we have been making deliberate, targeted investments. This quarter, we saw early signs that our targeted actions are resonating in the areas we've prioritized....Fluke delivered another strong quarter in data center.

Industrial Scientific's expanded commercial coverage drove acceleration in EMEA, and our investment in a broader sales team for Fluke and ASP in India directly contributed to strong growth in the region. We also made progress in advancing the recurring elements of our portfolio, enhancing customer engagement, and strengthening the durability of our revenue streams. In Q4, recurring revenue again grew faster than consolidated revenue, driven by continued strength in Fluke's maintenance software and deeply embedded data, as well as AI-enhanced software capabilities across IOS and AHS segments. Moving to the second pillar, disciplined capital allocation is an integral component of our Fortive Acceleration strategy. Consistent with our priorities, in the second half of 2025, we repurchased about 26 million shares, or roughly 8% of our diluted shares outstanding.

We also continued to refine our M&A funnel and processes to reflect our go-forward strategy, prioritizing accretive bolt-on deals that meet our rigorous strategic and financial criteria. In the second half of the year, we closed two small transactions that met this high bar, enabling us to actively strengthen our M&A muscle. As we look to 2026 and beyond, our capital deployment priorities for new Fortive remain crystal clear: invest in organic growth, pursue bolt-on M&A, where the risk-adjusted returns exceed other uses of capital, 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. Moving to our final pillar, building and maintaining investor trust. We were pleased to deliver performance ahead of expectations in Q3 and Q4, including Adjusted EPS that surpassed the high end of our guidance range.

We recognize there is more work to do here, and we remain confident and focused on delivering the 2026, 2027 financial framework and further acceleration that we committed to at our Investor Day in June 2025. With that, I'll turn it over to Mark to walk through our financial results for the fourth quarter.

Thanks, Olumide. I'll begin with slide 5. In the fourth quarter, we delivered total revenue of $1.1 billion, up just over 4.5% year-over-year on a reported basis, and up just over 3% on a core basis. We are pleased to see volume growth return and solid performance across all regions. We again delivered core growth in both IOS and AHS, with IOS outperforming our expectations and AHS performing broadly in line. In IOS, solid customer demand and strong commercial and operational execution drove acceleration from Q3, with better-than-expected results in professional instrumentation and in gas detection. In AHS, overall results were broadly similar to Q3, including continued strength in healthcare software. From a geographic perspective, all regions grew nicely, with North America delivering another quarter of solid growth.

APAC growth remained steady, and Europe accelerated from Q3, an encouraging data point, but not yet a sustained trend. Latin American sales also picked up the pace of growth sequentially, driven by strong performance in professional instrumentation. Adjusted Gross Margin in the quarter was about 63%, down about 150 basis points from prior year, driven largely by product mix, the net effect of tariffs and countermeasures, and targeted growth investments in our AHS segment. Q4 Adjusted EBITDA was $358 million, up about 8% year-over-year. Adjusted EBITDA margin expanded approximately 100 basis points to nearly 32%. This strong operational performance was driven by operating leverage, alongside continued progress on deliberate organizational streamlining across the portfolio and a sharpened focus on corporate cost discipline.

We delivered Adjusted EPS of $0.90 in Q4, up about 13% year over year, marking our second quarter of double-digit EPS growth. Strong Adjusted EPS performance was driven by growth in Adjusted EBITDA and the positive year-over-year impact of share repurchases, partially offset by modestly higher tax expense. Our full-year Adjusted EPS of $2.71 represented year-over-year growth of just over 12%. We generated about $315 million of free cash flow in the fourth quarter and about $930 million of free cash flow for the full year. Our full-year 2025 free cash flow conversion on adjusted net income remains nicely north of 100%. Moving to our segment results, starting with Intelligent Operating Solutions on slide 6.

Revenue for the segment grew just over 5% on a reported basis, with core revenue growth of about 4%, nicely ahead of our expectations. Growth was driven by both price and volume and reflected solid performance across professional instrumentation, facility and asset lifecycle software, and gas detection products. At Fluke, we saw strong FBS-driven commercial and operational execution and resilient customer demand, resulting in another quarter of modest sequential acceleration despite the challenging comp from prior year. North America continues to be the strongest growth driver, and we were encouraged by early signs of improvement in Europe and green shoots from commercial efforts in Latin America and Asia Pacific. Our facilities and asset lifecycle software businesses continued to deliver solid results, driven by strong demand for multi-site facility maintenance and marketplace software in North America....

Government demand for procurement and estimating solutions is beginning to stabilize, but remains pressured compared to the strong growth we saw for several years post-COVID. Our gas detection business is growing nicely, buoyed by strong demand and share gains. We saw particular strength in our hardware as a service product line and broad strength in North America. Adjusted Gross Margin in this segment was just under 67%, down about 130 basis points, primarily due to product mix and the net effect of tariffs and related countermeasures. Q4 Adjusted EBITDA in the segment grew 8% to $288 million, driven by operating leverage and reduced costs associated with flattening and rationalizing segment-level organizational structures, partially offset by targeted growth investments to support innovation and commercial initiatives.

Adjusted EBITDA margin expanded to just over 37% in IOS, which is up about 100 basis points from prior year. Moving to our Advanced Healthcare Solutions segment on slide 7, we delivered total revenue of $353 million. Revenue grew approximately 3% year-over-year and 1.6% on a core basis. As we noted throughout the year, we continued to see reimbursement and funding policy changes impact the AHS segment, specifically the deferral of U.S.-based hospital capital expenditures. However, demand trends improved again in Q4, and we are encouraged by the health of the commercial pipeline and positive customer feedback regarding the superior technical performance of our low-temperature sterilization offerings. Our software products in the segment continued to deliver solid growth, fueled by strong execution and structural advantages from resilient SaaS-based revenue models.

Adjusted gross margin in this segment was 56% in Q4, versus roughly 58% in the prior year period, driven by strategic investments to drive growth. Q4 Adjusted EBITDA in this segment was $92 million, and Adjusted EBITDA margin was 26%, with year-over-year variance driven by our growth investments as we position ourselves for acceleration in the years ahead. Turning to slide eight. As noted earlier, we deployed an incremental $265 million to share repurchases in the fourth quarter, reflecting continued confidence in our ability to deliver on our value creation plan. Additionally, we repurchased another roughly 2.5 million shares since the end of the quarter, bringing total fully diluted shares outstanding to approximately 315 million as of the date of this call. Our balance sheet remains strong.

We finished the year at 2.6x gross debt to Adjusted EBITDA, and we have ample capacity to execute on our capital deployment priorities in 2026. As previously highlighted, our full year 2025 free cash flow was about $930 million, with free cash flow conversion on adjusted net income nicely over 100%. We remain steadfast in our commitment to our capital allocation priorities and an overall approach that seeks best relative returns. Moving to slide 9, we are initiating our full year Adjusted EPS guidance of $2.90-$3.00 per share. This outlook assumes a continuation of the market dynamics we experienced in Q4. It also reflects current tariff rates, with tariffs net of countermeasures not currently expected to be meaningful to the bottom line in 2026.

Let me provide a few additional considerations to assist with modeling. Based on current foreign exchange rates, we are assuming reported revenue of nearly $4.3 billion and core revenue growth in the range of 2%-3%. We are planning for a mid-teens adjusted effective tax rate on a full year basis, with Q1 through Q3 in the high teens and Q4 in the high single digits to low double digits. We are currently modeling a full year net interest expense of just over $120 million. Our current diluted share count is roughly 315 million shares, taking into account the incremental share repurchases done since the end of the fourth quarter. In terms of the shape of the year, on a reported basis, we would expect top and bottom line to broadly follow recent historical patterns.

At current rates, we would expect FX to be an approximately 300 basis point tailwind in the first quarter, a tailwind that should ease as we move through the year. As the year unfolds and we continue to execute on our Fortive accelerated strategy, quarterly phasing may evolve. As a final note, before turning it back to Olumide for closing remarks and Q&A, we're off to a strong start at New Fortive, and we remain committed to unrelenting execution on the Fortive accelerated three-pillar value creation strategy and financial framework that we outlined at our June 2025 Investor Day. We recognize there is much more to do, but momentum is building and we're excited about what lies ahead. I'll now turn it back over to Olumide.

Thanks, Mark. I'll wrap up with a few reflections on where we are and where we are headed. We are now a stronger, more focused Fortive. Over the last six months, we've simplified our operating model, sharpened our strategic and capital allocation priorities, evolved our Fortive Business System into an even more powerful engine for sustained growth, and elevated our team's focus on the source of all growth, our customers. That clarity is translating into stronger internal alignment and real excitement across our teams. Importantly, we are seeing signals that our Fortive accelerated strategy is working. First, in the second half of 2025, we delivered accelerating growth, expanding margins, and double-digit EPS growth while investing deliberately in the initiatives that position us to deliver on the multi-year financial framework we outlined at Investor Day.

... Second, we are allocating capital with discipline to deliver the best relative returns over the medium to long term, and executed $1.3 billion of share repurchases in the last two quarters. Finally, we are committed to building and maintaining investor trust, and we are pleased to have delivered results ahead of expectations in our first two quarters as New Fortive. We are encouraged with the progress we've made in these early innings. However, we have significant unfinished business and untapped potential, and we are driving with urgency, intensity, and accountability to unlock it. As we look ahead to 2026 and beyond, we are confident in the path we're on, energized by our momentum, and committed to delivering strong performance for our shareholders.

I want to thank every one of our Fortive employees around the world who do extraordinary work every day and dedicate themselves to our shared purpose of innovating essential technologies to keep our world safe and productive. Every one of our 100,000 customers who entrust us with their mission-critical safety and productivity needs. Thank you all for your continued interest in Fortive. With that, I'll turn it to Christina for Q&A.

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