Fortive Corp (FTV) — Q4 2018 Earnings Call Transcript

Thank you, Ian. 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 Friday, February 22, 2019. Instructions for accessing this replay are included in our fourth quarter 2018 earnings press release. We completed the divestiture of the Automation & Specialty business in the fourth quarter on October 1, 2018, and accordingly, have included the results of the A&S business as discontinued operations for current and historical periods. The results presented on this call are based on continuing operations. 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 on a continuing operations basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, 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 uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors may cause actual results to differ materially from these forward-looking statements and is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2017, and 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. With that, I'd like to turn the call over to Jim.

Thanks, Griffin, and good afternoon, everyone. Our performance in the fourth quarter provided a strong finish to 2018, capping off another transformational year for Fortive. Looking at the full year, we generated adjusted earnings per share of $3.06 on a continuing operations basis, a 25% increase year-over-year, driven by 4.1% core revenue growth and 35 basis points of core operating margin expansion. The strong top-line performance of our core portfolio reflected solid execution against a range of ongoing growth initiatives as we drove product innovation and invested in our market-leading brands to continue enhancing our competitive advantage, take market share, and position Fortive for sustained outperformance over the long term. Over the course of 2018, our team significantly accelerated the portfolio transformation process that we have pursued since our spin. During the year, we announced several strategically significant transactions, including the acquisitions of Gordian and Accruent, the divestiture of the A&S business to Altra, and the pending acquisition of Johnson & Johnson Advanced Sterilization Products business. These transactions greatly advance our stated strategy to reposition the portfolio in higher growth, less cyclical markets. Taken together, the total acquisitions announced since the spin represent $1.7 billion in total revenue on an annualized basis, growing at a high single-digit rate. These acquisitions, which average 70% recurring revenue, greatly enhance the recurring revenue profile of the Fortive portfolio. The acquisitions of Gordian and Accruent advance the execution of Fortive's digital strategy, which is focused on addressing a range of critical software-enabled workflows for our customers. Both Gordian and Accruent are off to a good start, demonstrating growth momentum through the end of the year. Turning to ASP. We made significant progress during the fourth quarter employing the Fortive Business System to prepare for a successful transition of the business to the Fortive family. Consistent with what Johnson & Johnson recently announced, we now expect to close the transaction late in the first quarter or early in the second quarter of 2019. We're very excited about the contribution ASP will make once it's integrated into Fortive, and we look forward to discussing the company and the opportunities ahead when the transaction closes. With that, I'd like to turn to the details of the quarter. Adjusted net earnings were $325.1 million, up 30% over the prior year, and adjusted diluted net earnings-per-share were $0.91. Sales grew 11.4% to $1.8 billion, reflecting a core revenue increase of 7.4%. All platforms posted core revenue growth, highlighted by Transportation Technologies, product realization, and sensing technologies, as well as very strong performance from Fluke and Industrial Scientific. Acquisitions, including Gordian and Accruent, contributed 580 basis points of top-line growth, while unfavorable foreign exchange rates reduced growth by 180 basis points. Geographically, high-growth markets core revenue grew high single digits with continued strength in Asia and Latin America. This growth was led by Gilbarco Veeder-Root, Tektronix, and Fluke. China, in particular, posted a strong quarter with low double-digit growth. While we remain cautious about certain parts of the China market, we are pleased with the continued outperformance in the fourth quarter and our strengthening competitive position. Developed markets' core revenue grew high single digits, reflecting continued strength in North America. Core revenue growth in North America was high single digits, led by strong performances at GVR, Fluke, EMC, and Industrial Scientific. Western Europe grew low single digits, led by high single-digit growth at GVR and Sensing Technologies and mid-single-digit growth at Tektronix. In the fourth quarter, we posted a gross margin of 51.1%, our fifth consecutive quarter of gross margins at or above 50%. Pricing accelerated to 80 basis points with four platforms delivering positive price during the quarter. Operating profit margin was 16.8%, with core operating margins increasing 40 basis points as strong PPV and productivity were partially offset by the dilutive impact of tariffs and unfavorable mix during the quarter. During the fourth quarter, we generated $387 million of free cash flow, representing a seasonally strong conversion ratio of 166%. We generated free cash flow for the full year of $1.1 billion, an increase of $180 million or 20% on a year-on-year basis. We were also pleased to see our annual free cash flow conversion increase to 120%, an 800 basis points increase from the prior year. Turning to our segments. Professional Instrumentation posted sales growth of 14%, including core revenue growth of 5.2%. Acquisitions contributed 1,020 basis points, while unfavorable foreign exchange rates reduced growth by 140 basis points. Reported operating margin of 16.1% reflected 545 basis points of dilutive operating margin associated with acquisitions and transaction expenses. Core margins were flat, reflecting the dilutive impact of tariffs at Fluke and Tektronix and some one-time warranty-related expenses in the quarter. Advanced Instrumentation & Solutions core revenue increased mid-single digits during the quarter, driven by continued outperformance at Fluke and ISC and strong growth at Tektronix. Field solutions core revenue grew low single digits, highlighted by mid-single-digit growth in developed markets, including strong performance for Fluke and ISC in North America. This growth was partially offset by a slight decline in high-growth markets due to continued weakness at Qualitrol. China, however, posted a strong quarter with low double-digit core growth. Fluke delivered mid-single-digit core growth, led by mid-teens growth at Fluke Calibration, and mid-single-digit growth at Fluke Industrial. Fluke had a strong finish to the year in China, highlighted by the increasing momentum behind Fluke's e-commerce efforts, which saw strong point-of-sale increases and continued share gains for its handheld products. Fluke Health Solutions saw a strong contribution from Landauer, which performed ahead of our expectations in its first full year within Fortive. The team leveraged FBS both commercially and in the factory, finishing with mid-single-digit growth and a notable gross margin expansion for the year, positioning the business to deliver strong returns in 2019 and beyond. We're excited about the progress we continue to see at Fluke Digital Systems. The eMaint CMMS offering continues to deliver strong growth, up greater than 20% for the quarter and full year. Fluke's innovative sensor offerings were a key element of its digital strategy needed to generate a strong positive response from customers, including the Fluke 3561 Vibration Sensor, which was recently named a 2018 Breakthrough Product by Processing Magazine. Industrial Scientific delivered low double-digit growth, led by North America and Asia. iNet saw greater than 20% growth for the quarter, while rental revenue increased high single digits. During the quarter, ISC completed the transition of the iNet offering to a fully cloud-based solution, enabling the delivery of better speed and uptime to our customers. ISC's commitment to FBS continues to yield strong operational improvements, including a significant decrease in working capital and a related increase in free cash flow over the course of the year. Qualitrol's core revenue declined high teens during the quarter, in line with our expectations, reflecting continued softness across its core geographic markets. We continue to expect the soft market conditions that challenge Qualitrol throughout the year to remain a headwind well into 2019. Product realization core revenue increased high single digits for the quarter, led by high single-digit growth at Tektronix and mid-teens growth in EMC. EMC posted a record quarter for revenue as it delivered against the backlog it carried into the quarter, including the volume that had been subject to customer-related delays, as mentioned last quarter. Given strong order flow, EMC finished the year with record backlog, setting up well for continued growth in 2019. Growth at Tektronix was broad-based across both developed and high-growth markets. Developed markets saw mid-single-digit growth, driven by Japan, North America, and Western Europe. We are pleased to see another quarter of double-digit growth for Tek in China driven by strong performance at Keithley. Tek continues to benefit from momentum it has generated from its targeted higher growth end markets. New product introductions remain a key driver of Tek's growth, reflecting the continued momentum behind the 5 and 6 Series oscilloscopes, which saw key customer wins in both the automotive and power end markets during the quarter. Our sensing technologies platform increased high single digits in the quarter. All of the platform's major regions saw strong growth, including high single-digit growth in Western Europe and mid-single-digit growth in North America and China. The strong performance in the quarter was driven by industrial and medical end markets, as well as revenue shifted from the previous quarter due to hurricane-related delays. We are excited about the number of new product initiatives across the sensing platform that launched in the fourth quarter, including the Setra next-generation industrial pressure transducer, the AXD, which is well positioned to gain market share based on its superior range of features and functionality. Moving to our Industrial Technologies segment. Revenue grew 8.1%, including core revenue growth of 10.3%. Unfavorable foreign exchange rates reduced growth by 230 basis points. Reported operating margin of 20.5% reflected a core operating margin increase of 95 basis points, driven by the incrementals on the strong volume in the quarter. Our Transportation Technologies platform core revenue grew low double digits, led by greater than 20% growth in high-growth markets and low double-digit growth in developed markets. Gilbarco Veeder-Root delivered mid-teens core revenue growth, driven by mid-teens increase in developed markets and a greater than 20% increase in high-growth markets. Developed markets were led by North America, reflecting strong EMV sales. As expected, Gilbarco continues to see an acceleration in EMV sales, including a major customer win at Murphy's USA and the continued strength of our programs with Shell and Chevron. China saw mid-teens core growth driven by continued demand at Veeder-Root for submersible pumps and automatic tank gauges related to ongoing double-walled tank upgrades. GVR's performance in high-growth markets also included significant growth in India, and synergies from the combined Gilbarco and Orpak product offering continue to drive share gains to enhance GVR's strong position in that market. Orpak continues to perform well globally, exceeding expectations and generating greater than 50% of revenue from software to enhance GVR's recurring revenue profile. TeletracNavman declined low single digits as low double-digit core growth in Asia Pacific was more than offset by high teens decline in North America. TeletracNavman continues to perform well in Asia Pacific, where the fourth quarter represented the 11th quarter out of 12 with double-digit core revenue growth. In North America, we have continued to experience a high level of customer churn, which remains a headwind for the business in 2019. Moving to franchise distribution. The platform grew core revenue low single digits. Matco delivered low single-digit growth, reflecting strong performance from diagnostic and specialty tools. Tool storage grew low single digits during the fourth quarter, and we are pleased with how that category performed over the second half of 2018, particularly within our premium tool storage product line. Matco's Maximus 3.0 diagnostic scan tool platform continues to perform well, driving improving growth in the diagnostics category and accelerating recurring revenue opportunities from the sale of MaximusFix, Matco's proprietary subscription-based automotive repair database. The Max 3.0 is expected to be a consistent growth driver in the coming quarters as Matco continues to roll out additional features and enhancements in the platform. To wrap up, we ended the year with a significantly enhanced portfolio with exposure to better end markets tied to attractive secular drivers, reduced cyclicality, a growing share of recurring revenue, and consistently robust free cash flow. This enhanced portfolio has us well positioned to continue to drive organic growth and innovation while also deploying our growing free cash flow into acquisitions that will accelerate our strategy and enhance our long-term competitive advantage. Alongside this portfolio transformation, we continue to generate strong core operating results consistent with the Fortive formula, driving full-year adjusted earnings growth of 25% and increasing free cash flow conversion to 120%. This year, once again, demonstrated the power of the Fortive Business System, enabling our team to execute a series of complex capital allocation strategies to transform our portfolio while driving innovation to better meet our customer needs and delivering sustained top quartile earnings growth for our shareholders. Turning to the guide, we are initiating our full year 2019 adjusted diluted net EPS guidance of $3.40 to $3.50, representing year-over-year growth of 11% to 14% on a continuing operations basis. This does not include any contribution from the pending acquisition of ASP. The guide also assumes 3% to 5% core revenue growth, core operating margin expansion of 50 basis points, an effective tax rate of 17%, and free cash flow conversion ratio of greater than 120% for the year. The adjusted diluted net EPS guidance also reflects the dilutive impact from the mandatory convertible preferred stock on an if-converted basis. The fundamentals across our enhanced portfolio remain strong, and we once again expect to outperform and deliver sustainable double-digit earnings growth in the year ahead. We are also initiating our first quarter adjusted diluted net EPS guidance of $0.64 to $0.68, which includes an assumption of 3% to 4% core revenue growth, core operating margin expansion of 25 to 50 basis points, and an effective tax rate of 17%. In closing, I'd like to extend my personal thanks and appreciation to our Fortive teammates across the world for their continued dedication to our shared purpose of delivering essential technology for the people who accelerate progress. It is the commitment of our team that provides the foundation for our enduring culture of continuous improvement and enables us to consistently deliver value for our customers and top quartile returns for our shareholders. With that, I'd like to turn it over to Griffin.

Thanks, Jim. Before we move into questions, I'd like to take this opportunity to announce that Fortive will host its Annual Investor and Analyst Day on May 16, 2019, in New York City. Further details will be circulated soon. That concludes our formal comments, and we're now ready for questions.

I wanted to clarify something. While I understand none of us have complete insights on China, you mentioned being cautious about the situation there. However, your numbers appear quite strong overall. Is there anything in your forward order book or any tangible information beyond what we’ve all read in the news?

I think there are a few points to address, Scott. Firstly, you are correct that we had another very strong year in China, concluding on a high note. I believe some of this performance may be linked to businesses pulling in orders to avoid potential price increases. Overall, it has been a very strong fourth quarter for China, which you've noted. As we look ahead, there are some factors to consider. For instance, we will be winding down some slower initiatives, like the double-walled tank upgrade at Gilbarco, which will slow down a bit in the latter half of the year. Additionally, we anticipate some slowdown in business for Tektronix, and we have already noticed this in the order book. Growth remains positive, in the mid-single digits, but it is likely slowing down from the double-digit growth we previously experienced. Despite these factors, we still believe we are outperforming, and it’s important to remember that January and February don't provide a clear picture in China. We really need to assess the situation in March for a better understanding. As we transition into the first quarter, we should have a clearer indication of whether our expectations can be exceeded.

Okay. Fair enough. I'm usually not this detailed, but I'll mention it anyway. Your 50 basis point margin guidance suggests that you've lost about 50 basis points over the year due to acquisitions, particularly on the gross margin side. I believe that bringing those businesses back to a fully integrated and normal state could provide a helpful boost. What I'm really asking is how much of that 50 basis points is about fixing the acquisitions compared to the natural growth from your 4% core revenue growth midpoint target.

So the 50 basis points for the year includes various factors that come into play annually. There are both positive and negative aspects. We will address some of these issues at the end of the year, and they are not expected to happen again. While other challenges may arise, we could see some improvement to that annual figure. However, we are dealing with the effects of tariffs. Even though we have managed to offset them at the earnings per share level, pricing to counteract the tariffs does not contribute positively at the operating margin level, which creates a bit of a visual challenge.

Just a first question maybe on the first quarter guidance. So you have core growth guided pretty similar for Q1 as for the year. EPS, though, is starting out kind of flattish year-on-year with the total year up low double digits. So maybe just help us understand the bridge there. Is it all about a lot of FX headwinds in the quarter? And then the margins, it's the tariff issue and some cost inflation? Maybe just any color on that.

Yes, thanks, Julian. A couple of things. As you noted, there's FX, we've got $0.04 of FX headwind in the year. Half of that is sitting in Q1. So there's a couple pennies there. Our tax rate is up year-over-year. It’s 17%, still really good. Those are the probably three big things that caught. And while I think we're guiding nominally lower in Q1 at 3% to 4% rather than 3% to 5% for the year, and that's reflecting maybe a little stronger finish in Q4. I think those are the main puts and takes there.

Understood. And then my second question, when we're thinking about professional instruments, specifically, what kind of core incremental margins should we expect for 2019 in terms of expansion? And maybe how quickly do we see that? Or do you anticipate Q1 still has a bunch of these maybe warranty issues and inflation to get over? I guess I'm trying to ask how back-end loaded you think the core margin expansion is at PI this year.

No, so the warranty impact is a one-time that we booked in Q4, and so that's not going to be a drag going forward. Normally, I think what we would expect probably 30% to 40% in VCM's incrementals falling through in the quarter and in the year. And just on the back-end loaded, I think we're pretty level loaded after Q1.

You mentioned the price-offsetting tariffs. What is the level of price you have embedded in that 3% to 5%?

We achieved 80 basis points of price increase in the fourth quarter, and we expect that to continue rising, as it has throughout the year. It could potentially reach 100 basis points or 1%.

Okay. Regarding GVR for the year, what growth are you anticipating for GVR? How much of that growth is influenced by the phasing out of the other regulation, especially with the EMV changes coming into play? Please discuss the expected growth rate for GVR and the potential challenges and advantages arising from these regulatory factors.

Yes, Jim here. We're currently projecting mid-single digit growth for Gilbarco this year. They had a stronger finish than we anticipated, which contributed to their double-digit growth in the fourth quarter. We believe they will maintain this momentum throughout the year. Although the double wall affected our overall numbers in China, it shouldn't be a significant obstacle for Gilbarco's larger operations. They continue to perform well in other high-growth markets like India, and we expect their growth in these markets to be solid this year. While these markets can fluctuate quarter-to-quarter, we’re optimistic about Gilbarco's performance in high-growth areas. Regarding EMV, we noticed strong business activity, and customers appear to be preparing for compliance by the end of 2020. As mentioned in July, Gilbarco’s performance has exceeded our expectations from that time.

Why wouldn’t Gilbarco perform better than mid-singles if that's the case? Don't you have really easy comparisons in the first half of the year? Or are you just being conservative on this front?

I believe we finished the year quite strongly. The fourth quarter will impact the full-year results, and we expect performance in the first half to exceed those numbers. However, we will face a challenging comparison due to the significant growth we achieved in the fourth quarter. We are likely to see higher growth rates in the first quarter, partly because we experienced some ERP issues during the same time last year. Therefore, we can anticipate growth above the mid-single-digit range in the first quarter.

Jim, could you talk about Western Europe actually? I mean, it was up low single digits which is better than last quarter, I think you were down low single digits. And as you know, there are concerns about growth over there. So what actually improved in the quarter? And what's embedded in your growth forecast for 2019 in that region?

You're talking about Western Europe, right?

Yes, we performed slightly better in the fourth quarter compared to the third, but it was still in the low single digits. We expected this outcome and have seen some declines in the third quarter. Although the fourth quarter showed minor improvement, we believe the environment in Europe will remain in the low to low single digits, potentially reaching mid-single digits, but we're keeping a cautious outlook based on various factors we've observed. For instance, one of the positive contributors this quarter was Gilbarco, which had a solid mid-single-digit performance, but we don't anticipate this trend to continue throughout the year. Therefore, our current view is that Western Europe will likely remain in the low single-digit growth range.

I was interested in your comments about China regarding your strengthening competitive position there. Could you provide more details on that? You mentioned e-commerce at Fluke, and it seems you're performing well in GVR. Do you think you could significantly increase your market share in 2019 and beyond in the Chinese market?

I believe the performance of Fluke this quarter was very strong, and we have a long-standing history of developing products for that market. We have both production and design capabilities in place to create the best products for the China market. We are committed to growing the business. An interesting example of our progress is that much of the e-commerce initiatives we implemented in China originated from Tektronix. This illustrates how we can learn from one another across our businesses. We have a good sense that we are performing well in the regions you mentioned. Our Tek performance is solid, although it can be challenging to compare market share with competitors since positions can fluctuate. However, we have experienced three consecutive years of double-digit growth in China, which is encouraging. These three major businesses form the foundation of our belief that we are outperforming, and I am confident that we can continue to excel.

And you're thinking mid-single-digit growth for China in 2019 based on what you have noted up?

That's right. That's where we're at right now. I think as I mentioned before, having been in China a lot over the course of 20 years, January and February don't give you a lot of color. You really got to get into March. So our best view right now with what we've seen from a point of sale perspective and what customers are telling us is mid-single digit.

Just two things for me. Just first, on J&J, closed maybe a little bit later than you hoped, but relative to your expectation, should we still be thinking about roughly $0.30 on an annualized full year run-rate basis for the first full year of ownership?

Yes, I believe there has been no change from the first four quarters going forward. We mentioned $0.30 to $0.35 last quarter, and that remains the same.

Okay, great. And then with respect to the EMV question, maybe a little bit to Steve's point, I just thought '19 would be a little bit stronger, too, to avoid maybe kind of a big fire drill in 2020 on the compliance deadline. Do you see a situation lining up where 2020 is kind of a big scramble? Or do you expect kind of a smooth acceleration into that compliance deadline?

I think what we've seen is that we had a stronger finish in 2018, which has some implications for us. We still believe that 2019 will yield good numbers based on what we are currently observing. At this stage, we're starting to consider that things may extend into 2021 more than we initially thought. No one has a perfect prediction for the future, but from our discussions, it seems that larger customers will be making decisions based on their existing liabilities and will thoughtfully approach their upgrades. Overall, our outlook suggests that things will continue to be positive, but likely push into 2021.

I think, Jim, you mentioned that Tek in China is expected to transition from double-digit growth to mid-single digits in 2019. Based on your guidance, what will happen to Fluke and Tek in 2019? Also, could you remind us how they performed in 2018?

Corporate? You mean for China or...

I believe Fluke's performance will be in the mid-single digits for 2018 and 2019. Tek is also expected to be in the mid-single digits, and they had a stronger finish in 2018. So, I think they are likely close to low single digits to mid-single digits in 2019. I hope that provides some clarity.

Yes, that's correct. That makes sense. Regarding the 3% to 5% guidance, what about the deals we have completed? How much do the recent acquisitions contribute to the overall 3% to 5%? I believe you mentioned, Chuck, that pricing accounts for a percentage; what about the other businesses we've engaged with recently?

The 3% to 5% represents core growth, which only includes Landauer, ISC, and Orpak. I calculated that it accounts for about 30 basis points. The more recent acquisitions will not contribute to core growth until the fourth quarter of next year.

Okay. So still pretty small, all right?

Yes.

Jim, if you were to think about your businesses without any outside influences, what concerns you the most for 2019? Focus solely on your operations and where you feel it’s necessary to apply the most pressure as CEO. In which areas do you think you need to concentrate your attention if there are any issues in 2019?

It's a great question, and I could elaborate on it for quite some time. When considering risk, we pay close attention to Western Europe, which, while not our largest market, has prompted us to exercise caution based on recent developments in Germany, for instance. China presents both risks and opportunities, and we aim to leverage the advantages available to us, particularly regarding GVR and the EMV opportunity. A notable success we've had recently is the order from Murphy's USA, which represents a significant win for us. Our goal is to continue achieving such wins and converting them into revenue growth while expanding our installed base over time. We are also committed to accelerating innovation and have made significant investments in digital analytics and IoT across several businesses. We've seen success with initiatives like Fluke Digital and are gaining valuable insights from companies like Gordian and Accruent. These topics will be central to our upcoming leadership conference, where we will engage with our top leaders on these initiatives.

Could you provide a quick update on Gordian and Accruent? I am interested in their year-over-year growth rates. Even though they are not core, I'm curious if they are achieving the expected growth and what the demand and order rates look like.

Yes, I believe we experienced a high single-digit growth rate for Accruent last year, surpassing our expectations. However, since we've only been in ownership for a few months, we won't take too much credit for that. Gordian likely performed slightly better, approaching double digits. Overall, they both started off strong. I met with the Accruent team a few weeks ago to discuss their 100-day strategic plan, and their energy and enthusiasm about what we can achieve together is inspiring. I think both businesses have great potential moving forward. The growth rates I just mentioned will likely reflect our outlook for 2019, but we will continue to monitor as we finish their strategic plans. As you know, we are always looking for opportunities to invest in growth to enhance those rates, although due to the current softer market, some impacts may not be felt until the latter half of 2019 and into 2020.

I want to kind of asking this same question as Deane but maybe a little bit different way. Portfolios, the segment's a little bit lopsided right now. Could we be, a year from today, looking at a three-segment portfolio? Does that seem to make more sense?

I think there might be some imbalance in what we currently have, and I don't entirely agree with that perspective. However, I understand your point regarding ASP. Once we incorporate it, we will evaluate what makes the most sense moving forward. At this moment, our focus is on bringing ASP on board, and it will evolve into its own platform. We will likely wait until the end of the year before making any decisions about segments.

Okay. Fair enough. The follow-up is simply, again, not to beat a dead horse here, but 3% to 5% organic growth. As I look at what’s coming into the organic in 2019, with the 17 acquisitions and some faster-growth acquisitions coming in late this year into the core, it seems like achieving 3% organic growth would be quite manageable. I'm curious about what specifically could bring you down to the low end of 3%. What concerns do you have that would justify a plus 3% growth, especially considering we discussed this at the Investor Day where we talked about GDP and possibly aiming for slightly higher numbers than GDP? Can you elaborate on your thoughts regarding the 3% growth target?

We agree with you, Scott. We're really excited about the businesses we've brought on, particularly Gordian, Accruent, and ASP. However, Gordian and Accruent will only contribute to that core number in the fourth quarter, and ASP will not contribute at all. So as we move into 2020, I think that’s an important point to consider.

I think it would really be two things. One, probably a little bit slower in Western Europe, and maybe China not coming back as expected. We referred to it as mid-single digit, but there’s a range of numbers within that, and they’re probably on the lower end of that range. North America appears solid. In February, it’s difficult to make predictions for the year; that’s not always a wise move without an economics degree. But the reality is we should focus on what we need to do for a market environment that looks like low to mid-single-digit growth depending on the business. If North America performs well, and Western Europe holds steady, while China continues to do well, then we could see higher results. If any of those factors change, I believe North America is the most likely to remain strong, and the other two could pull us down to the lower end of the guidance.

Yes, to continue with the first quarter, I realize we've discussed this quite a bit already, but I wanted to highlight your earlier comment about pricing during that period. The comparison will become easier, and you mentioned that GVR seems to be improving. Jim, you mentioned the possibility of some pull forward in China. Are there any other instances of pull forward that you can identify, or any unusual developments in the backlog? Otherwise, considering January is behind us now, it should be easier to navigate the upcoming period.

Yes.

Yes, we believe there will be approximately 70 to 100 basis points of growth in the fourth quarter, which we attribute to business that likely would have occurred in the first quarter. If you examine our guidance, part of that growth is indeed in the range of 70 to 100 basis points. The increase in Q4 stems from several factors. Firstly, there was some business at Gilbarco where customers decided to allocate year-end funds for orders to be recognized as revenue in the quarter. Additionally, EMC experienced significant customer demand for their content, marking their best quarter in the company’s history. Furthermore, we saw some acceleration of pricing actions related to tariffs at Fluke and Tek. All these elements combined account for the 70 to 100 basis points. As we look ahead, we feel optimistic about North America and China based on our performance, though we recognize that some of these results likely represent business that would have taken place in the first quarter.

Got it. And then just to stick with that same line of thought, is there anything on the margin side that we should think about in a 4Q to 1Q bridge? I know there's a lot of moving pieces with the deals and obviously with ASP if it closes in the quarter, that will move it around further still, but anything sequentially that adds on, drops off kind of beyond a volume input?

No, I think that's the main thing, difference there from Q4 to Q1, especially when you look at what normally happens between these quarters, it's a significant step down, but nothing that comes to mind that's abnormal.

So a lot of ground covered, but wanted just to get a little more specific. Can you actually give us the ballpark of where EMV revenue ended for 2018 so we just know the jumping-off base for that piece of the business?

We are currently a little over 40% through the cycle as we close out 2018, which aligns with our expectations, possibly slightly ahead. However, we believe the cycle extends further than we initially anticipated. For the remaining portion, which we estimate to be around 60%, we won't reach 100%. We have been stating that we expect about 85% by the end of 2020, but we now think that number may be extending a bit further. I don’t want to be overly precise since that can be misleading, but we believe that more than 4 to 5 points will likely be pushed into 2021 at this stage.

Just as you look at your growth assumptions over 2019, I was curious as you think about field solutions and sensing technologies, I'm curious how you're looking at the overall growth potential for either of those two segments in 2019 relative to some of the growth you saw in 2018.

All the platforms have growth, John. As we mentioned in the prepared remarks, the two places where individual businesses might be negative for a few quarters, one at telematics and the other, Qualitrol. So those individual businesses, Qualitrol sits in field solutions, telematics in Transportation Tech, but they're obviously not even close to the biggest businesses in those platforms. So the platforms will continue to grow, but those individual businesses are probably the businesses we're working the hardest to make sure we can turn them around, if you will.

Just on Professional Instrumentation, as I think about Pacific Scientific, Tektronix, a, how did the federal-related revenues do in the quarter? And any impact from shutdown on the ability to collect the book business in the first quarter?

Yes, interestingly enough, very little. We had the business booked. We were a little worried about EMC because they have some resources that need to approve the products before they ship, but the team did a great job in managing that. We had a slight impact at Gordian, but overall, it was probably within the norm for a company of our size and scale. So far, there has been no direct impact. You might suggest that it’s too early to determine if there are any secondary or tertiary impacts.

I apologize for being repetitive, but Chuck, I'm having difficulty understanding the first quarter numbers, and I believe many others are too, so let’s revisit that. It appears to me that your organic and foreign exchange figures fell in line with the top line in the first quarter. Could you explain the expenses related to mergers and acquisitions and how they have changed year-over-year in the first quarter based on external estimates and Gordian's? My calculations suggest that the impact is lower in the third quarter, so I'm trying to comprehend why your midpoint guidance is only a penny above last year. Any clarification on this would be appreciated.

So one thing I think our tax rate is up in Q1, not down. You said our Q1 tax rate is down.

Q1. Okay.

Yes, our tax rate is going to be 17% in Q1, and I think it was around 15.3% and thereabouts in the prior year.

Okay, nothing else? Nothing smaller? So okay, we'll take it off-line and go...

I mentioned that in the quarter, foreign exchange had an impact of $0.02. Additionally, there are challenges from taxes, and the increase in shares this year has also posed some difficulties.

Okay, we will discuss this further offline. Regarding the PI margin, we have mentioned this previously. Jim, I believe you spoke about some negative mix in PI. Are you indicating that Fluke and Tektronix performed exceptionally well this quarter? Could the negative mix in PI be a reason for the flow? Chuck, could you possibly provide more details about this since I am not fully prepared for February?

I don't believe there was a mixed impact in PI. There are two main factors affecting PI. The tariff primarily impacts Fluke and Tek, which likely accounts for 60 basis points of headwind on our OMX. Additionally, the warranty costs are around $6 million, contributing another 40 basis points. So, when considering these two factors, they are the reasons why our OMX is flat; otherwise, we would have achieved triple-digit growth.

And Nigel, I think we touched on the mix in our prepared remarks, which leaned a bit more towards IT than PI. That's what we're referring to. Overall, this is the situation at Fortive. As Chuck noted, he has addressed all the questions regarding Professional Instrumentation. We are quite optimistic about the margins in PI for the fourth quarter. While we are not pleased about the one-time charge related to our warranty issue, ultimately, when you consider that alongside the efforts made by our teams to alleviate some significant tariffs, we are satisfied with the outcome. We believe this positions us well as we navigate through 2019.

The impact from acquisitions on PI significantly increased from the third quarter. While I understand there is additional time from Gordian and Accruent included, it turned out to be larger than anticipated. I'm interested in your thoughts on how this might carry over into 2019 on a timing basis.

Are you talking about the step up around the amortization or the step up on the deal cost?

Not the transaction cost, the minus 375 for acquisitions, yes.

Okay.

On the revenue side, we definitely received full credit for both deals in the fourth quarter. I believe that number will become significant in the fourth quarter of next year. The fourth quarter tends to be a strong period for those businesses, so I wouldn't recommend multiplying that number by four.

Okay. I have a question about the average selling price. Sterilization is a significant focus outside of hospitals, so I'm interested in how the trend towards single-use products affects the average selling price. How do these opposing trends interact?

The impact on our products due to the trend towards single-use is minimal. We have been monitoring certain technologies that may present opportunities in this area. However, our technologies and the products we sterilize have very limited exposure to single-use. Globally, there is still significant underpenetration. While the U.S. and Europe have developed standards and regulations, markets like China present substantial untapped potential across various hospitals. The market is imbalanced, with little exposure to single-use products. Recently, I met with several sales leaders who are enthusiastic about the opportunities ahead as we implement some of the Fortive Business System tools. Overall, as we delve deeper into this business, we see considerable growth potential. Thanks, Ian, and thank you all for joining us this evening. It's unusual to see cold and snowy weather in Seattle, but despite the conditions, we are extremely enthusiastic about what lies ahead in 2019. We had a remarkable end to the quarter, achieving over 7% core growth, marking our highest core growth quarter ever, along with 30% earnings growth. While this is fantastic, we recognize that our best days are still to come, thanks to the significant portfolio transformation work we accomplished this year. We appreciate your support, and Griffin and the team are here to address any questions and provide clarification tonight and tomorrow. Thank you all, and have a wonderful night.