Fortive Corp (FTV) — Q2 2017 Earnings Call Transcript

Thank you, Hope. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures is available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Thursday, August 27, 2017. Instructions for accessing this replay are included in our second quarter 2017 earnings press release. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meaning of the federal securities law, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2016. 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. With that, I'd like to turn the call over to Jim.

Thanks, Lisa, and good afternoon, everyone. We are pleased with our performance as we mark Fortive's first anniversary. One year ago, we launched Fortive with a greater strategic focus. Key to that was accelerating growth investments to strengthen our market-leading positions and capital deployment for acquisitions. The Fortive Business System was highlighted as the cornerstone of our competitive advantage. FBS is our playbook for accelerated innovation and superior customer satisfaction to drive improved core sales growth, operating margin expansion, and strong free cash flow. We have consistently made meaningful progress towards all of our strategic and operational goals since the separation. I'm happy to announce that we have signed a definitive agreement to acquire Industrial Scientific Corporation, a leading provider of portable gas detection instrumentation and a safety-as-a-service pioneer in an all-cash transaction for a purchase price of approximately $600 million. The addition of Industrial Scientific accelerates our digital strategy and creates a stronger platform for connected solutions for critical applications in maintenance and safety. The business is a natural extension of our current field solutions portfolio and has a highly complementary customer base. Consistent with both Fluke and Qualitrol growth strategies, Industrial Scientific generates recurring revenue from a subscription-based model, which combines hardware, monitoring software, and consumables into a safety-as-a-service offering. We are assuming a second half close without a meaningful impact on 2017 results, but we do anticipate 2018 earnings accretion. Now I'd like to turn to the details of the quarter. Our adjusted net earnings of $249.9 million were up 13% over the prior year. Adjusted diluted net earnings per share were $0.71 with an effective tax rate of 26.3% for the quarter. Sales grew 4.7% to $1.6 billion, reflecting a core revenue increase of 5.4%. Five out of six strategic platforms grew core sales mid-single digits or better, reflecting strong volume, market share gains, and continued performance in high-growth markets. The favorable impact from acquisitions accelerated to 40 basis points of growth during the second quarter, partially offset by 110 basis points of unfavorable currency translation due to the strength of the U.S. dollar. Geographically, high-growth markets core revenue grew double digits, with continued strength across Asia. High-teens growth in China was driven by increased demand for Tektronix, Qualitrol, Thomson, and Kollmorgen. Excluding China, high-growth markets core revenue grew low double digits. Developed markets core revenue grew low single digits, reflecting continued strength in Western Europe and incrementally better industrial markets in North America. North American growth of low single digits reflected strong performance at Gilbarco Veeder-Root, Fluke, and Kollmorgen, which were somewhat offset by Jacobs Vehicle Systems. We continue to outperform in Western Europe, posting high single-digit growth as continued market share gains in key project wins were realized in Gilbarco Veeder-Root, Qualitrol, and Kollmorgen. Gross margin was 49.4%, with approximately 60 basis points of expansion and Professional Instrumentation offset by nearly 45 basis points of contraction in Industrial Technologies. Notably, field solutions expanded gross margins 125 basis points in the quarter through the use of FBS lean tools driving supply chain and manufacturing efficiencies. We are pleased that, for the first half, we delivered strong gross margin expansion of 70 basis points. Operating profit margin was 21.4%, with core operating margin expansion of 90 basis points in the quarter and 125 basis points year-to-date. Both periods benefited from lower amortization. During the second quarter, we generated $217 million of free cash flow and delivered a conversion ratio of 90%, which keeps us on track for greater than 100% for the full year. Using FBS tools across our operating companies, we were able to improve working capital turns by 0.5 turn led by strong improvements at Fluke, Tektronix, and Gilbarco Veeder-Root. Turning to our segments. Professional Instrumentation posted sales growth of 4.8% with core revenue growth of 6.6% and an operating margin of 24.4% with 240 basis points core expansion, which includes 140 basis points benefit from lower amortization. Advanced Instrumentation & Solutions core revenue increased high single digits during the quarter, driven by strong growth in product realization and field solutions. Field solutions core revenue was up mid-single digits in the quarter, with both Fluke and Qualitrol posting strong core revenue growth. Fluke's mid-single-digit core growth was led by Fluke Industrial and Fluke Networks, which delivered mid-single-digit and high single-digit growth, respectively. As we highlighted last quarter, Fluke Networks' performance reflects the continued impact of the FBS growth room with sales conversions up 30% sequentially. Industrial growth was led in North America, where sales were up mid-single digits, with point-of-sale data trending better across all product categories. eMaint continues to grow sales double digits, leveraging the strength of Fluke's large installed base. In May, we launched Fluke Accelix, which is the platform brand for our digital and condition-based monitoring offerings. Additionally, in late June, we acquired SCHAD, a small technology company based in Germany. The SCHAD technology adds a suite of software products that simplify data integration and mobile work management for our customers. We have also reached an important early phase milestone for Fluke Accelix by starting key pilots with several large customers. Qualitrol delivered high single-digit growth led by further penetration of conditions-based monitoring solutions for European and Chinese OEMs as well as utilities in the Middle East. Good growth in North American retrofits was driven by FBS as we focused on improving funnel visibility and identifying adjacent market opportunities. In China, we gained share with transformer OEMs via new product penetration and ultra-high voltage transmission. In June, the Qualitrol team closed the key order for a comprehensive monitoring system for a Middle Eastern national electrical utility. We are pleased with our high-growth market expansion strategy as our go-to-market investments in targeted geographies continue to pay off. Moving to product realization, platform core revenues were up low double digits for the quarter led by growth in Tektronix. Tektronix low double-digit core revenue growth continues to be driven by high-growth markets where sales grew strong double digits this quarter. This performance reflected in part Keithley 3D sensing sales in Korea and China. China continued to deliver low double-digit growth, driven by increased demand for our leading technology targeting the optical and semiconductor end markets. We see encouraging signs entering the second half of this year as the China semiconductor market build-out is only in the middle of what we estimate to be a 5-year opportunity. We launched the Tektronix 5 Series mixed-signal oscilloscope in June, which is the first in a series of hardware and software launches. We are pleased with the performance to date and the strong positive reaction and technology reviews received from the market. This groundbreaking technology favorably positions us in our targeted automotive and power segments, which is consistent with the strategy we discussed at Investor Day. As we previously noted, this new platform will have a more meaningful impact starting in 2018. Our sensing technologies platform delivered mid-single-digit core revenue growth in the quarter, led by double-digit growth in high-growth markets and improved stabilization in the U.S. Growth was primarily driven by China and general industrial end market improvement in the U.S. Our sensing technology teams continue to see accelerating progress on our strategy of broadening our system development capability. As an example of this, we saw greater than 30% sequential improvement in our target vertical funnels at Gems. Moving to our Industrial Technologies segment. Revenue grew 4.7% with core revenue growth of 4.5% and delivered operating margin of 20.9%. The favorable impact to operating margins from increased demand for our products overall was offset by greater R&D investments and a decline in franchise distribution core revenue. Year-to-date, strong volume and improved productivity drove 90 basis points of core operating margin expansion. Our Transportation Technologies platform posted mid-single-digit core revenue growth in the quarter, led by mid-single-digit growth in Gilbarco Veeder-Root. The performance at Gilbarco Veeder-Root came in better than expected on share gains in Europe and Brazil with several large North American retailers who continue to upgrade to EMV-capable dispensers. Global dispenser sales were up high single digits, reflecting the preference for our products around the world. We were excited to announce last month that Gilbarco Veeder-Root successfully processed the industry's first U.S. EMV chip transaction at a fuel retail site using our passport point-of-sale solution in Encore fuel dispensers. We also launched Ligo, our new fuel point-of-sale system from Orpak in high-growth markets. This technology is a key building block to future Insite360 services and to advancing our systems strategy in high-growth markets. We are on track to close on the previously announced acquisition of Orpak in the third quarter of 2017. Telematics realized core revenue growth of low single digits in the quarter led by strong SaaS sales growth in Australia and New Zealand and increased installed base in Europe. These results were partially offset by a sales decline in North America despite improvements across key metrics in the U.S. Given this positive trend, we expect to return to growth next quarter in the U.S. with an acceleration to exit the year at mid- to high single-digit growth at telematics. Automation and specialty grew core sales mid-single digits driven by double-digit growth in high-growth markets and robotics, both of which are aligned with our high-growth market and IoT growth initiatives. Growth was partially offset by flattish sales at Jacobs Vehicle Systems. Kollmorgen posted low double-digit core revenue growth, reflecting strong demand across our global industrial automation product line, which is driven by continued robotic strength in Europe, China, and Japan. Comau, a leading European player in mobile robotics, recently launched its new mobile robotics solution, Agile1500, utilizing Kollmorgen's guidance control system. Thomson delivered low single-digit core revenue growth driven by double-digit growth in high-growth markets, reflecting key project wins for factory automation applications in Asia. Jacobs Vehicle Systems is continuing to see strong sales in China and an improvement in North America, reflecting an increase in heavy-duty truck orders. Franchise distribution core sales declined low single digits, reflecting a low single-digit decline in core revenue at Matco. For the first half, hardline core revenue grew high single digits, and the Maximus family of diagnostic products grew core revenue double digits. Despite the strength in these product lines, we have seen a pause in demand for tool storage. To wrap up, we took important steps towards accelerating growth with both organic and inorganic strategies. Progress towards our EMV, high-growth market, digital, and portfolio enhancement growth initiatives, including $1 billion of announced acquisitions since the separation, positions us well going into the second half of 2017 and into 2018. We are raising our full-year 2017 adjusted diluted net EPS guidance range to $2.72 to $2.80, which includes our updated core revenue growth expectation of mid-single digits and an effective tax rate of 26.5%. We continue to anticipate core margin expansion in excess of 50 to 70 basis points for the year. We are also initiating our third quarter adjusted diluted net EPS guidance of $0.69 to $0.73, which includes assumptions of mid-single-digit core revenue growth and an effective tax rate of 26.5%. And with that, I'd like to turn it over to Lisa.

Thanks, Jim. That concludes our formal comments. Hope, we are now ready for questions.

So the deal, $600 million I think. Can you just remind us, just break down the billing you spend and then on this specific deal, a little more color on sales margins to the extent you can give us?

Yes. I will begin with the $600 million deal. We are very enthusiastic about ISC. This is a business we have had a long-standing relationship with, particularly with the McElhattan family. We have nurtured this relationship over time. We anticipate that ISC will generate between $170 million and $180 million in revenue this year. This aligns well with our return targets of 10% over a three-year period according to our ROIC model. We feel confident about the expected returns and the business's future performance. It is well-aligned with our strategy regarding digital initiatives, especially as it involves connected instrumentations that integrate deeply into customer workflows and crucial technology, which aligns with our shared purpose. Additionally, a significant portion of the revenue comes from a recurring subscription-based model, which is beneficial. The financial and strategic outlook for the business is very promising. For 2018, we are looking at a valuation of about 10 to 12 times EBITDA, presenting a fantastic opportunity for us to generate long-term value at a price that allows us to achieve our disciplined return objectives within established timeframes.

So like $0.10 of accretion next year-ish?

Well, I think we'll wait till we get the deal inked and closed and then wait for the guidance next year. But we expect to be accretive next year for sure.

Okay. And then the other deal, just remind us of what else makes up the $1 billion?

So the first couple of hundred million, we acquired eMaint and GTT in Q4 of last year, and then earlier this year, there was Orpak for around a similar amount. And then we did a small technology deal called SCHAD. It's a single-digit acquisition, but we got some technology that'll help us with our connected solutions.

So for the second half, you're projecting mid-single-digit growth. It doesn't seem like there's a significant slowdown compared to the first half, but we are facing some challenges with EMV. Can you explain what's improving in the second half that could compensate for the unexpected slowdown in EMV and help us return to mid-single-digit growth?

Yes. So first, I think I would say that the third quarter for EMV looks pretty good. So we had a couple of orders that came in that'll keep us maybe a little bit better for the third. I would suggest that the other part is really the North American industrial market broadly. We've seen an uptick through the quarters here in places like Fluke. As we mentioned on the prepared remarks, our sensor businesses in automation all saw improvements in North America. So it's really the combination of a little bit better EMV than we originally thought and probably to some extent, the North American industrial market sort of solidifying a little bit as well.

Yes. I would like to follow up on ISC. Does this impact your product line within the overall business, or do you plan to operate this as an independent entity? Additionally, what percentage of revenues would you categorize as SaaS?

We see this as the third component of the field solutions platform, creating strong synergy with Fluke and its core customers. There are significant opportunities in various industrial settings where maintenance workers also utilize safety technologies. We believe there is a genuine chance to connect our initiatives with Fluke and ISC. However, ISC will operate as an independent business, boasting an impressive growth trajectory on its own. Currently, the recurring revenues for ISC are approximately 40%, making it the high-growth segment of the business. If this trend continues, it will evolve into a robust recurring revenue model in the long term.

Okay, that's great. And then just turning to industrial. You called out R&D as a headwind to margins this quarter. Obviously, margins were pretty flat year-over-year. Anything else in there? Is there any mix impacts, price roles to think about as well? And then you called out the franchise as a pause in the storage solutions. I think we saw some weakness from Stanley in auto, Snap-on, too. So I'm just wondering, any perspective you have on what's causing this pause?

Yes. The margin compression we are experiencing in Industrial Technologies is related to Matco, which is slowing down and is one of our highest-margin businesses. This creates a slightly negative mix. However, despite this slowdown, we are seeing good margin expansion year-to-date. We believe that as we move into the second half of the year, this trend will continue. The current situation is mainly due to a challenging comparison from last year.

We have observed some positive product lines in franchise distribution. Our participation in expos increased by 10% compared to last year, which is a good sign. Many of the forward-looking health metrics are also favorable, particularly in diagnostics and some of our hardline tools. However, we are experiencing a slowdown in tool storage, which has been noted by others in the market as well. While we have reliable sales data indicating some deceleration, I believe this is more of a temporary pause after several years of strong growth. Historically, when we faced prolonged slowdowns, we also noticed changes in health metrics, but we anticipate this might only last another quarter or so as we navigate these challenges. Overall, we still have confidence in the business and believe we can create opportunities for ourselves as we progress through the year.

Just focusing again on the Industrial Tech segment, is there any impact you're seeing right now from input costs there? And I guess the assumption was that the gross margin decline was a blip simply from mix? Or should we see, for example, better pricing in the second half in IT that will help that gross margin rebound?

Yes. We believe that regarding the margin profile, as Chuck mentioned earlier, there have been some mix challenges as we shifted from Matco to other businesses within the segment. We've also encountered a few one-time events. However, year-to-date, both gross margins and operating margins for the segment are strong. We view this situation as primarily temporary. Heading into the second half, we are very confident in our ability to achieve further margin improvements in Industrial Technologies. As for input costs, they are not a significant factor in this scenario. Our purchasing cost price reductions are solid, and we review these metrics monthly. We have been managing our input costs effectively. Overall pricing has been favorable across the portfolio, with five of our six platforms achieving at least a 20 basis point increase, and many are in the 30 to 50 basis point range. We still anticipate maintaining a price range of 30 to 50 points for the year. Therefore, we believe the gross margin fluctuations we experienced are more of a one-time issue, and we are optimistic about the outlook for the second half.

And then my second question would just still be within Industrial Tech but on the sort of turnaround effort within telematics. Just give us an update with that reorganization underway, how you're thinking about the progress there. And also, I guess it sounds as if you are going to see an improvement in sales trends. How much is that sort of end market-driven versus your own reorganization?

Yes. I believe the end market has been performing well, but it's not necessarily gaining traction. There is some assistance from ELD, though it constitutes a small part of the market. We attribute the improvement primarily to our own efforts. We have been focused on enhancing the business, starting with the integrated platform. We have altered our approach to market and adjusted some investments to leverage that change. We achieved the highest number of gross adds in North America for a quarter compared to previous quarters. Our churn rates are looking positive, and our gross add figures are strong. Additionally, our average pricing metrics are improving. Overall, the long-term metrics we monitor are all favorable for this quarter. However, in a SaaS business, it takes time for these improvements to reflect in revenue projections. As mentioned in our prepared remarks, we expect to see mid- to high single-digit growth as we close out the year, and we see no reason we can't continue that growth into 2018. At that point, we anticipate being at least at market level, but we are committed to outperforming the market in the years ahead.

Nigel, as you remember, what we're talking about here is mostly a North America challenge. Outside the U.S., we continue to do well.

Just on the point-of-sale color, Jim, I know you pointed to industrial kind of being better in the back half, offsetting maybe EMV. Could you just elaborate a little bit more on the point-of-sale strength that you're seeing, how broad it is? It sounds like it's mostly centered in Fluke, but perhaps it's broader than that.

Yes. In the past two quarters, we've mentioned that the U.S. was stable, but now it seems to be improving slightly. At Fluke, we have good visibility into point-of-sale data, which aligns with the mid-single-digit growth we've observed in North America. We're not experiencing any inventory buildup. We also receive valuable point-of-sale information from other locations like Kollmorgen, and similar trends are evident there as well. Overall, we feel optimistic about the current trend.

I was curious about the deal pipeline and whether the relationship you've had for a long time was affected by being part of Danaher, potentially causing it to be put on hold and not currently a viable prospect if they weren't ready to sell. Can you comment on whether there are any situations where the interest may have diminished but is now being reignited? Additionally, does this have any impact on your pipeline as you look ahead to 2018?

I believe the pipeline has been influenced by several factors, which I mentioned over the past year. One significant factor is that we have become a more focused industrial company, adopting a strategy similar to ISC's regarding connected devices and leveraging digitization alongside the mobile workforce. This has led to a notable shift in our strategies, aligning closely with ISC’s vision for the future. There are indeed instances within our pipeline where we can identify businesses that have shown increased interest in engaging with us. However, it’s important to consider that the timing and approach from the families involved also play a role in this situation. Therefore, I wouldn’t conclude that such interest wasn’t possible in the past. We are thrilled to have these businesses join our team, as we share similar perspectives on the market. Regarding field solutions, the work that Wes and the team at ISC have accomplished aligns well with our strategic goals, as demonstrated by the small deal with SCHAD, which empowers us with valuable technology for integrating and managing industrial sites with various data applications. Overall, this reflects the wide-ranging opportunities in our funnel. We’ve maintained that our funnel looks promising, and this quarter exemplifies that with a combination of a significant deal and a smaller technology agreement that further advances our strategy, especially with the finalization of Orpak. We are enthusiastic about this quarter because all the elements we have discussed are coming together as we celebrate our one-year anniversary.

Jim, I want to clarify your comments on the profitability of Industrial Technologies. For your third-quarter guidance, do you anticipate year-over-year operating margins to increase? Are you expecting margins to trend upwards by year-end? What are your thoughts on this?

We would expect that both segments will have good operating margin expansion in the third quarter and the fourth quarter.

All right. All right. So that clears that up. Can I ask you about the ISC for a sec? So what kind of growth do you expect out of this business as you apply your tools to it? What sort of a growth rate on the top line would you expect? And I don't know if you said there were revenue synergies. But if there are, could you maybe talk a little bit to what those might be and how significant that could be?

Yes. When we consider value creation, we are acquiring a strong business with an excellent team. This business is likely to perform well on its own, having achieved mid-single-digit growth consistently over the years. The iNet platform, which focuses on safety-as-a-service, has shown even better growth. As this platform becomes a larger part of the business, we anticipate its growth trajectory will rise to high single digits in the near future. This outlines the business's growth profile. From a synergy perspective, we can certainly provide global reach assistance. Our Fluke platform is our most global one, and both Fluke and Qualitrol have experienced significant growth internationally. We'll also help them invest in more technology, and they can offer some advantages to us as well. M&A will be a key aspect, allowing us to support them with capital and many of their initiatives. These factors will focus on expanding the ISC business in collaboration with the existing team. FBS presents an exciting opportunity as we engage with CEO Justin McElhattan, who will remain with us. Justin expressed enthusiasm about their progress on the lean side, and I'm eager about the growth and leadership tools we can introduce to the business. These are all promising synergies. Specifically, we have developed a concept called safetenance, merging safety and maintenance. This refers to situations where maintenance professionals enter regulated environments requiring gas detection equipment while using Fluke tools. The ability to integrate our connected tools within the maintenance workflow, similar to our work with eMaint, presents another growth opportunity. While it may not be the primary driver for the model, we believe it offers solid growth potential for the platform over time.

Safetenance, huh, I like that.

I haven't trademarked it, so hopefully, the team has.

And in that context, I think you're on track here. Maybe one more question for me. You raised prices by what seem to be a significant amount in the PI business. What was that? Was it related to Tektronix’s new product? How did you achieve that? And can it be maintained?

I believe that it can be sustained. We have had strong pricing and are working from solid price comparisons. If I remember correctly, last year we had a strong price comparison in the second quarter, making it a difficult benchmark to exceed. However, I believe we can maintain our current pricing due to the strength of our market positions. This strength comes from our differentiated technology, our brand, and the robust relationships we have with our customers, which ultimately provide us with pricing power. While we don't exploit this advantage, we recognize that creating more value allows us to implement higher prices. For our new products, we exclude their pricing from our overall calculations, so while new products may yield better gross margins, they do not contribute to our price calculations.

Yes. I think it mentioned an increase of 0.3 for the first half and an increase of 0.6 for the second quarter, which is quite a significant difference. Are you suggesting that it wasn't solely a comparison and that other factors were involved?

No, that's right. Yes, we did improve a little bit. I think at Fluke, we had a much better second quarter. I think we had moved some price increases around the world. I think we had moved them from the first quarter to the second quarter. So I think we started to get traction on that in the second quarter.

Jim, you just mentioned price in PI. When I look at incremental margins in that business, I mean, they were very strong in the quarter. When you gave us your initial FY '17 walk at the beginning of the year, you highlighted that you expected $0.04 to $0.05 of productivity and restructuring benefits in '17 versus '16, but I think a lot of that in PI. So are you getting more EPS than you expected so far from these benefits? And what would that updated number be versus that $0.04 to $0.05 that you talked about at the beginning of the year?

Andy, it's Chuck. I don't believe we're receiving more than anticipated from restructuring. We're achieving exactly what we expected. What's evident, particularly in PI, is that core growth has been improving since Jim mentioned those points and the incremental margins we've generated from that business. This is what will impact the WIP.

Okay, that's fine. And then you guys have continued to sort of outperform expectations in Western Europe, high single digits, again, which I think is above most of the peers that have reported this quarter. We know you've been doing well in share growth. But how sustainable do you think this kind of growth is moving forward? And where would you say it's mostly coming from?

No. I think I've been proven wrong a couple of times. I keep telling our Europe team that their work makes me look bad. However, the reality is that we're likely to see some moderation in that growth. We have secured key project wins that have driven accelerated performance over the past quarter or two, particularly in Kollmorgen and Gilbarco. While we have experienced this growth, I believe it will moderate to mid-single digits in the second half. Some of this is due to tougher comparisons since we are coming off high single-digit growth from the second half of last year. There's a bit of a comp effect in play, along with a slight slowdown in several areas of the core business.

Jim, just following up on that, Kollmorgen, I think you said it was up below teens this quarter, and I think it was up in mid-single digits last quarter. So is that business actually accelerating based on the robotics offering that you have? Or how's that business doing?

Yes, it is. The Kollmorgen team has done an excellent job. We've been focusing on this effort for some time. As you're aware, we needed to leverage project wins from a couple of years ago to gain momentum, and we're starting to see that now. The North American industrial market is showing some improvement as well. As I mentioned earlier, there's a bit of positive momentum in North America for our industrial business, particularly in Kollmorgen and Fluke, possibly more than in other areas. We believe this trend is sustainable based on current point-of-sale observations. In response to your specific question about Kollmorgen, it's really a mix of gaining market share and some improvement in North America.

I would like to revisit the ISC deal and ask why you chose to focus on gas detection. This is a competitive market, with Honeywell having a significant stake through Zellweger and First Technology. Additionally, Danaher attempted to acquire First Technology for gas detection about ten years ago, leading to a bidding contest with Honeywell. Has this been a priority for you all along? What makes gas detection a compelling choice at this time?

I would prefer not to reflect on the past decade, even though I was likely part of it. It really comes down to the convergence of technology. There are significant players in safety, such as Honeywell, MSA, and 3M. However, we believe we have a unique advantage as pioneers in safety-as-a-service. This business model and our established relationships with workflow, combined with our other field solutions, position us differently in the market. While there may be multiple providers in a single facility, we are confident in our sustainable position due to the strong foundation that has been built, as well as our significant capabilities with Fluke.

So just on that point, Jim, on the idea you're going to run this business as a third leg, but might you consider migrating some of the subscription-based model into your other instrument businesses?

Yes, I believe there is definitely an opportunity. The team at ISC is very strategic and has achieved a lot of impressive milestones. They are truly leaders in developing this type of business model. We bring certain skills from our SaaS-based operations in telematics and Insite360, but we also provide essential expertise in industrial recurring revenue at ISC, which is relevant across all of our industrial sectors. So, to answer your question quickly, we see this as an opportunity to leverage. Additionally, their location in Pittsburgh enables them to maintain a strong partnership with Carnegie Mellon, which excels in artificial intelligence, robotics, and software development. They offer significant expertise and connections that we previously lacked. We are thrilled about the possibility of them joining our team, and we believe this will be beneficial for us in the long run.

I guess I'll lay off the ISC questions. I think we've hit most of the key points there. I wanted to pivot back to GVR. You talked about some strength in the quarter and that 3Q orders for EMV are better than expected. I'm just wondering if you could comment on whether the recent announcement from Exxon that it's incentivizing upgrades across its branded stations contributed to the EMV order flow and then maybe how these incentives could impact trends through the duration of 2017.

Yes. We announced our position with Exxon and have a strong relationship with them. We didn't see much impact from that in the second quarter, and we don't anticipate a significant impact in the third quarter either. It helps to solidify things, but it’s still uncertain. More broadly, we observed some strength from two large retailers we work closely with. They purchased earlier and in larger quantities than we expected, which boosts our outlook for the third quarter. Therefore, we believe the second half will perform better than initially anticipated. However, there is still the possibility of challenges in the fourth quarter or the first quarter of next year. At some point, we expect people to take a pause. In general, the strength of Gilbarco this quarter is related to international business as much as it is to North America, where we received slightly more business than we had planned.

Okay. And then, I guess, shifting gears to Keithley. You again mentioned 3D sensing. I think Pat Byrne, at your Analyst Day, highlighted 3D sensing being a more than $20 million opportunity. We've seen several suppliers in this market provide pretty aggressive guidance for the September quarter. So could you comment on how that business is faring beyond your prepared remarks? And then pertaining to the $20 million market opportunity comment from your Analyst Day, can you help us understand the time frame to recognize that opportunity?

Yes. Our opportunity is significant, as many are discussing 3D sensing, especially on the sensor side. We are still assessing the overall potential for us, and we have tasked Pat and the team with helping us understand this in our strategic planning for the year. At Keithley, we observed strong performance even without 3D sensing. Without it, they still achieved mid-single-digit growth in the quarter. The Keithley team is executing very well. Most of the $20 million related to 3D sensing was seen in the second quarter, likely all in the first half, driven by a couple of customers in Korea and China. While the opportunity appears to be broader, we have not fully realized it yet. We capitalized on the available opportunities and will assess the full potential over a longer period.

This is actually Patrick Wu standing in for Charley. Just wanted to touch on the very last question that you guys had with 3D sensing. Obviously, the $20 million opportunity, can you size for us that market just in terms of what the addressable market possibly could be out there?

It will be tough for us to do at this point. I think that's probably something we'll gauge here by the end of the year. As I mentioned, we, Chuck and I, will start here shortly after this call, in fact, next week, going through strategic plans with some of the businesses. That'll carry throughout the third quarter in August and September. So we'll get a sense of when the tech team walks us through that, what that looks like, but at this point, we don't really have a gauge. So we had specific market opportunity with some customers and some design wins that we got that are very centered on the Keithley technology that's really flexible for manufacturing lines. So they really took advantage of the flexibility of that technology. But I think more broadly, how our whole offering really pertains to 3D sensing is still work to be done for us.

As we examine the strength of your M&A pipeline, what is the management team's focus regarding specific regions or areas? Could you provide more insights into your thoughts on where you are looking next, both in terms of geography and product categories?

Well, I think, yes, maybe looking back 12 months helps us look forward into the future. And I think what you've seen from us over the last 12 months, as Chuck articulated, is roughly $1 billion of spend. A number of those deals are really focused on accelerating our digital strategies, taking advantage of software, buying businesses that are deeply embedded in the workflow where we can extend solutions over time, leveraging our current business structure in most cases. We focus mostly on field solutions and transportation technology. They're the 2 platforms that are our largest 2 platforms and probably have the most serve-to-market opportunities. So certainly, I think we'll continue to do that and build on the strength of presence and strength of market positions we have in those businesses. And those businesses are almost 2/3 of the company. So that is certainly something we will continue to do. We will continue to look globally. We think that there are opportunities outside the U.S. Obviously, the Orpak acquisition is headquartered in Israel. It's a great example of how we're trying to globalize the business, build on technology capability in other parts of the world. You'll see us continue to do that. And then I suspect, as we noted in our Investor Day, that we'll continue to look for new platforms where there's opportunity. And we've highlighted a few places and secular trends that we'd like to think about going forward to do that, and we'll continue to think about those. I think we're now gaining more expertise into how to buy and integrate the software businesses, and quite frankly, I think that'll be part of it. And I think this quarter's example of being able to do that and create a lot of the value and hit our return hurdles has been demonstrated.

Thank you all for joining us on this rainy day here in Seattle, which is unusual for the summertime. We are very excited to begin our second year at Fortive. We feel good about the progress we've made regarding the strategic opportunities and operational targets we set for ourselves. Chuck, the leadership team, and I look forward to discovering even more opportunities as we celebrate our first year and embark on this new one. We hope to see you all soon, and if we don’t speak before the end of the summer, have a wonderful summer. Lisa and the team are here to answer any questions you may have. Thank you, everyone.