Fortive Corp Q1 2026 earnings call

Thank you. 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 statement 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, 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. Q1 marked a strong start to the year with another quarter of solid performance. We remain laser-focused on delivering on our strategic and financial plans for 2026 and continue to make encouraging progress on executing our Fortive Accelerated strategy. We have four key messages to cover today. First, our teams executed well in the first quarter of 2026, delivering solid performance in both segments. On a consolidated basis, we delivered core revenue growth of just over 5%, adjusted EBITDA growth of 13%, and adjusted EPS growth of over 25%. Please note that our core revenue growth in the quarter was aided by approximately 150 basis points of tailwind from additional year-over-year selling days in the quarter.

Second, we continue our disciplined capital allocation approach with a relentless focus on optimizing shareholder returns over the medium to long term. In the first quarter, we completed approximately $500 million of share repurchases. We've now reduced our share count by just over 10% since we launched new Fortive in July 2025. Third, with three quarters of execution now behind us, our confidence continues to build in the power of the Fortive Accelerated strategy to unlock benchmark beating returns for our shareholders over the medium to long term. I'll spend a few minutes on this in the next slide. Lastly, we are reaffirming our full-year adjusted EPS guidance range of $2.90-$3.00. Based on our Q1 performance and trends to date, we believe results are trending toward the upper half of that range. Moving to slide four.

Before we get into our Q1 results, I want to highlight some of the progress we're making in executing the three pillars of our Fortive Accelerated strategy. Starting with the first pillar, delivering faster profitable organic growth, powered by our Fortive Business System amplified. This quarter, we continued to increase our innovation velocity with several notable hardware product milestones and AI-enhanced product launches. As discussed last quarter, Fluke launched a new data center testing solution, CertiFiber Max, with the fastest throughput in the industry in late Q4. Customer response continues to significantly exceed our expectations, underscoring the strength of Fluke's brand and the effectiveness of our broader data center strategy.

We are particularly encouraged by CertiFiber Max's ability to drive meaningful pull-through of other Fluke products into data center applications, including power quality, battery testing, imaging, and calibration solutions essential for both build-out and ongoing operations and maintenance of data centers. In healthcare, we introduced Provation Mira Documentation Assist, a real-time AI-powered, voice-driven documentation capability enabled by deep domain expertise and proprietary data and embedded directly into GI procedural workflows. This solution enables clinicians to capture structured documentation during the procedure, reducing the need to reconstruct details afterwards and enabling the clinical team to focus on the best patient care. On the commercial side, we continue to focus on faster-growing end markets and regions where we've made deliberate, targeted investments to capture growth.

At Fluke, we continue to invest in commercial expertise across high-growth verticals such as data centers, defense, and distributed energy, and we're seeing solid early traction from our focused efforts. At ASP, we continue to advance our made-in-region strategies in India and China, supported by related commercial investments, and we're beginning to see positive impact of these efforts in our results. We're also advancing ASP's growth strategies in EMEA with the European commercial launch of STERRAD ULTRA GI. On our recurring customer value initiatives, we continued to make progress on driving deeper customer lifecycle engagement and improving revenue durability. In Q1, recurring revenue again grew faster than consolidated revenue in both segments. Our recurring customer value progress continued in our iconic hardware brands. Fluke continues to make progress on increasing recurring revenue with double-digit services growth in the quarter.

Industrial Scientific continued to see strong growth and share gains in our hardware-as-a-service product line. Moving to the second pillar, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. Consistent with our priorities, we deployed another roughly $500 million to share repurchases in Q1. Since the spin-off, we've deployed approximately $1.8 billion to share repurchases, representing 35 million shares or just over 10% of diluted shares outstanding. Our revamped bolt-on M&A engine and team is in place, and we will continue to evaluate opportunities for high-quality, accretive bolt-on acquisitions that meet our rigorous strategic and financial criteria. Looking forward, our capital allocation priorities remain clear.

Invest in organic growth, pursue bolt-on M&A where 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 solid performance ahead of expectations for a third consecutive quarter as new Fortive. That is a good start, and we look forward to building on our momentum. We remain laser-focused on executing against our 2026 financial and strategic plan and continue to have strong confidence in our 2026, 2027 financial framework that we shared at our June 2025 Investor Day. With that, I'll turn it over to Mark to walk through our financial results for the first quarter in more detail.

Thanks, Olumide. I'll begin with slide five. In the first quarter, we delivered total revenue of nearly $1.1 billion, up almost 8% year-over-year on a reported basis, and up just over 5% on a core basis, benefiting from an approximately 150 basis point tailwind from the impact of additional year-over-year selling days in the quarter. We were pleased to see price and volume growth at both segments, driven by healthy customer demand and strong commercial and operational execution, leading to solid performance across the board. We were also pleased to see strong growth in software revenue, reflecting the underlying strength of our businesses and robust customer demand for our increasingly AI-driven new product releases. From a geographic perspective, we saw another quarter of solid performance in North America, which continues to be our strongest region.

Europe improved sequentially, reflecting stabilizing conditions and solid commercial execution. Adjusted gross margin in the quarter was just over 63%, down about 100 basis points from prior year, which is largely consistent with the year-over-year gross margin trends we saw last quarter, and was driven mostly by the net impact of tariffs that were introduced last year. Q1 adjusted EBITDA was $314 million, up about 13% year-over-year. This strong performance was driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by continued innovation and commercial growth investments. Adjusted EBITDA margin in the quarter expanded approximately 140 basis points year-over-to-year to just over 29%.

We delivered adjusted earnings per share of $0.70 in Q1, up over 25% year-over-year, marking our third consecutive quarter of double-digit adjusted EPS growth. Strong adjusted EPS performance was driven by growth in adjusted EBITDA and the positive year-over-year impact of share repurchases. We generated $194 million of free cash flow in the first quarter, with Q1 conversion on adjusted net income in line with normal historical patterns. Our trailing 12-month free cash flow conversion remains north of 100%. Moving to our segment results, starting with Intelligent Operating Solutions on slide six. Revenue for the segment grew about 8% on a reported basis, with core revenue growth of about 5%, modestly ahead of our expectations.

Based on the product mix in the segment, the year-over-year impact of additional selling days in Q1 resulted in a roughly 100 basis point benefit for IOS, making normalized core growth in the segment broadly consistent with what we saw last quarter. Core growth was driven by both price and volume, reflecting solid performance across professional instrumentation, facility and asset lifecycle solutions, and gas detection products. At Fluke, order volume was strong, with orders growth outpacing revenue growth, and our teams continued to execute with strong operational discipline while increasingly deploying investment dollars towards growth initiatives.

North America continues to be the strongest growth driver, and we were encouraged by another quarter of sequential improvement in Europe. Growth in facilities and asset lifecycle solutions accelerated from Q4 and was again accretive to the IOS segment, with particular strength and demand for multi-site facility maintenance and marketplace software in North America. Our commercial investments and accelerated pace of innovation across these businesses are beginning to bear fruit. Our gas detection business continues to grow nicely, buoyed by strong demand and share gains from our hardware-as-a-service product line in North America, Europe, and the Middle East as we begin to see our investments in the business show up in our results.

Adjusted gross margin in the segment was just over 65%, down about 150 basis points year-over-year, which is largely consistent with the year-over-year gross margin trends we saw last quarter, primarily due to product mix and the net effect of tariffs. Q1 adjusted EBITDA in the segment grew 8% to $255 million, driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by targeted growth investments to support innovation and commercial initiatives. Adjusted EBITDA margin for Q1 was just over 34% in IOS in line with the comparable period prior year. Moving to our Advanced Healthcare Solutions segment on slide seven, we delivered total revenue of $326 million. Revenue grew approximately 8% year-over-year and approximately 6% on a core basis.

Our healthcare consumables and software product lines benefited from the year-over-year impact of additional selling days in Q1, resulting in a roughly 300 basis point benefit to growth for AHS. On a normalized basis, we saw slight acceleration in growth versus last quarter. Q1 growth was driven by solid demand for healthcare consumables, services, and software in North America. Low temperature sterilization capital demand improved modestly in Q1, though hospital spending pressures continue to persist. Our software products in the segment continue to deliver strong growth driven by effective execution and strong provider demand for our gastrointestinal case documentation solution. Adjusted gross margin in the segment was about 59% in line with the prior year period, with modest operating leverage offset by the net impact of tariffs.

Q1 adjusted EBITDA in the segment was $84 million, up approximately 18% year-over-year, driven by operating leverage, structural cost savings, and the favorable impact from foreign exchange rates, partially offset by targeted growth investments to support innovation and commercial initiatives. Adjusted EBITDA margin in Q1 expanded by about 200 basis points year-over-year to just under 26%. Turning to slide eight, our balance sheet remains strong. We finished the quarter at 2.8x gross debt to adjusted EBITDA, reflecting a modest increase in commercial paper to fund share repurchases in the quarter. We continue to have ample capacity to execute on our capital deployment priorities in 2026, and we remain steadfast in our commitment to disciplined capital allocation and an overall approach that seeks best relative returns.

As noted earlier, we deployed roughly $500 million to share repurchases in the first quarter, reflecting continued confidence in our ability to deliver on our value creation plan. As a result, diluted shares outstanding were approximately $309 million at the end of Q1. In addition to retooling our process and revamping our M&A team, integration and the execution of our value creation plans for the two small bolt-on acquisitions we completed in Q4 are both going according to plan. We continue to be on the lookout for high quality, accretive bolt-on deals that meet our rigorous strategic and financial criteria. Moving to slide nine. We are reaffirming our full-year 2026 adjusted EPS guidance range of $2.90-$3.00 per share.

Given the trends to date, inclusive of Q1 performance modestly ahead of our expectations, we believe results are trending towards the upper half of that range. This outlook assumes a continuation of the market dynamics we experienced in Q1 and reflects current tariff rates. Let me provide a few additional considerations to assist with modeling. Based on current foreign exchange rates, we expect full-year reported revenue of around $4.3 billion. We continue to expect core growth in the 2%-3% range, and given strong order patterns, we believe results are trending towards the upper end of that range. In terms of the shape of the year, based on Q1 results modestly ahead of our expectations, we expect Q1 will comprise a slightly higher percentage of total revenue than historical patterns with Q2 and Q3 broadly in line.

We would note that Q4 has four fewer year-over-year selling days, resulting in a $15 million-$20 million revenue headwind in the quarter. We expect FX and M&A combined to be about a 150 basis point tailwind to reported revenue in Q2, moderating to roughly 50 basis points-100 basis points throughout the second half of the year. We are now modeling a Q2 effective tax rate in the mid-teens, Q3 in the high teens, and Q4 in the high single-digit to low double-digit range. We are also expecting full-year net interest expense of just over $135 million. Based on what we see today and based on these modeling considerations, we would expect Q2 and Q3 adjusted EPS to be broadly similar to what we delivered in Q1.

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 to 2026 at new Fortive, and we remain committed to unrelenting execution on the Fortive Accelerated three-pillar value creation strategy and financial framework.

Thanks, Mark. Let me close with a few observations on the quarter and where we're headed. Q1 represents a strong start to the year and further evidence of the progress we're making as new Fortive. We delivered solid organic growth, meaningful adjusted EBITDA growth, and a third consecutive quarter of double-digit adjusted EPS growth while continuing to invest deliberately and execute diligently against our Fortive Accelerated strategy. We're seeing early traction from our innovation, commercial and recurring customer value growth initiatives. We are methodically allocating capital in ways that we believe will generate the best rates of returns over the medium to long term, and we remain steadfast in our commitment to building and maintaining investor trust. Our teams are aligned, our FBS operating cadence is strong, and our confidence in the 2026, 2027 financial framework we outlined at Investor Day 2025 is fully intact.

I want to thank our Fortive team members around the world for their commitment to our shared purpose of innovating essential technologies to keep our world safe and productive. Our 100,000 customers for placing their trust in us every day. With that, I'll turn it back to Christina to open the call for questions.

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