Fortive Corp (FTV) — Q3 2023 Earnings Call Transcript

Thank you, Krista, and thank you, everyone, for joining us on today’s 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 Regulation G is available on the Investors section of our website at fortive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2022. 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, Elena. Hello, everyone, and thank you for joining us. I’ll begin on Slide 3. In the third quarter, we continued to see the benefits of our portfolio strategy with core growth and margin expansion in all segments. Third quarter core revenue growth was 2.5%, tempered by specific headwinds in healthcare and slowing in parts of Sensing in China. Strong execution by our teams drove substantial improvement in gross and operating margins, earnings and free cash flow. Adjusted gross margins expanded by 160 basis points to 59.7%. Adjusted operating margins increased by 150 basis points to 25.9%, and adjusted earnings per share grew 8% and free cash flow increased 25% to $384 million. As you can see, our strategy is delivering results with enhanced portfolio positions, innovative new products, and dedication to the Fortive Business System, allowing us to consistently perform despite a mixed macro environment. As we look ahead, our attractive funnel of bolt-on and adjacent M&A opportunities across our three segments and five connected workflows are expected to drive upside in 2024 as exemplified by the acquisition of EA Elektro-Automatik as well as three other bolt-ons in the quarter. Turning to Slide 4. We wanted to highlight how the year is playing out relative to our initial expectations and begin to frame our thinking for 2024. Beginning on the left, hardware product orders were stronger in the first half of the year as traction on new product launches and leveraging secular drivers provided more backlog to buffer the normalization of supply chains. Hardware product orders were down mid-single digits, which we believe reflects continued solid demand with orders up over 20% on a three-year stack basis in the third quarter. Point-of-sale trends in North America and Western Europe have remained healthy even as channels normalized, while we did see slowing specifically in China and parts of Sensing in the quarter. Software and services continue to demonstrate their resilience with high single-digit growth across our facilities and asset lifecycle, environmental health and safety, and perioperative customer workflows. The healthcare environment continues to improve. Core growth in the third quarter was constrained by clearing channel inventory in ASP and continued weakness in the bioprocessing market in Invetech. Turning to the right-hand side of the slide, we are delivering 2023 performance ahead of our initial expectations coming into the year with mid-single-digit core growth with adjusted operating profit margin incrementals over 60%, delivering nearly 2x the margin expansion planned for the year. We are accelerating our capital deployment in the quarter with robust free cash flow and ample firepower to fund attractive M&A opportunities. Further evidence that our strategy to create a more durable growth company is working is highlighted on Slide 5. Our innovation and portfolio strategy continues to build on leadership positions in our connected workflows benefiting from customer investments in key megatrends, including automation and digitization, the energy transition, and the need for productivity solutions contributing to our improved through-cycle performance. We have several good examples across Fortive, including: providing customer software solutions to digitize and automate processes and deliver customer success in AI-driven ecosystems. Provation is partnering to enable real-time AI in the GI workflow, contributing to their strong win rates and accelerated mid-teens growth in 2023. And in the third quarter, Fluke added Azima DLI, a bolt-on acquisition, accelerating their AI-enabled predictive maintenance capabilities with vibration analytics and remote condition monitoring. Fortive is also helping to solve our customers’ toughest energy transition challenges with breakthrough innovations. Fluke and others are both benefiting from strong demand in solar, EV storage equipment and the build-out and modernization of electric grid infrastructure. In addition, Fluke acquired Solmetric to further solidify their leadership position in the fast-growing distributed energy market with high-precision solar test and measurement products. In this environment, our customers are putting a premium on productivity. ASP is launching new sterilization monitoring products, broadening their leading position in biological indicators, allowing customers to reprocess surgical instruments with greater speed and efficiency. Further, Gordian acquired NSR, a natural extension of the reconstruction workflow, which provides cost data that will allow them to expand job order contracting in the UK. Turning to Slide 6. We are pleased to announce our agreement to acquire EA Elektro-Automatik, enhancing our leading position in advanced electronic test and measurement solutions. EA specializes in the high-power segment of the market that serves a number of growing end markets, including data centers, energy storage, e-mobility, grid modernization, and hydrogen power alternatives. EA expands Tektronix's addressable market. It complements and diversifies their offerings in the fastest-growing areas of the power market, solving for power density and efficiency challenges and creating a more sustainable and electrified world. With an estimated $175 million of revenue and low 40s operating margins in 2023, EA is expected to be accretive to our growth in margins. Tektronix's global scale, including a 10x increase in go-to-market resources, accelerates EA’s global market expansion. Further, the Fortive Business System will be a valuable tool in achieving commercial, manufacturing and operational synergies, creating unparalleled value for customers and shareholders. As a result, we are targeting an attractive double-digit return profile in year 5 and earnings accretion that ramps as we delever, given our robust free cash flow. In summary, the acquisition of EA reflects our commitment to more durable higher growth and our ability to drive higher returns for Fortive for years to come. Turning to Slide 7. The Fortive Business System continues to be a differentiator for us, enabling our business to drive innovation and profitable growth. We recently completed our annual CEO Kaizen Week. This event is a hallmark of our culture of continuous improvement and our ability to deliver outstanding results in our operating companies in one powerful week. As always, we brought together our most senior Fortive leaders, including our segment leaders and many of our operating company presidents with a total of 41 teams and over 500 team members driving significant improvements in growth, margins, free cash flow, and breakthrough innovations. Some Kaizen highlights include: at ISC and Qualitrol, their events realized 100% to 125% improvements in productivity. ServiceChannel reduced their time to onboard new customers, and Provation had a 2x improvement in the conversion of marketing leads, both enabling more and faster ARR growth. Tektronix deployed a Copilot, leveraging AI to bring technical expertise to customers and internal automation to significantly improve their efficiency and customer experience. And Fluke Health Solutions had breakthrough results in dosimetry reporting, reducing customer response time by more than 50%. In summary, this year’s event continued to emphasize the power of the Fortive Business System and the breadth of applications across our portfolio driving sustained results. I will now provide more details on each of our three segments, beginning with Intelligent Operating Solutions on Slide 8. IOS grew core revenue by 4% with good growth in most regions. Margins continue to benefit from our portfolio evolution with high-margin software growth as well as price realization and productivity benefits driving 230 basis points of adjusted operating margin expansion. Highlights in the quarter included, core revenues were up low single digits as solid core demand and NPI traction buffered expected channel normalization. EMA continued its strong performance with another quarter of double-digit revenue growth. Fluke secured a number of wins in secular growth markets, including a sizable calibration order from an aerospace and defense customer. Fluke also continues to see success with new product introductions with the recent launch of MecQ, a first-to-industry acoustic imager for diagnosing mechanical failures. EHS revenues grew mid-single digits with double-digit iNet growth at ISC and another strong quarter for SaaS and Intelex with over 50% growth in ACV customer bookings in the quarter. In addition, Marathon Petroleum, our largest iNet and SAFER Systems customer recognized Industrial Scientific with their Corporate Exceptional Partnership Award. Facility and asset lifecycle revenues grew high single digits, driven by continued strength in SaaS. Gordian continues to drive market penetration as more customers utilize their job order contracting platform to procure and manage their large infrastructure projects. Accruent secured an agreement with Zavery University to provide its facility management software, which included cross-selling with Gordian, and ServiceChannel launched several innovations for both subscriber and provider software releases contributing to strong overall growth. Turning now to Slide 9. Precision Technologies reported 1% core revenue growth and adjusted operating margins of 26.5%, expanding 60 basis points, reflecting strong price realization and productivity benefits. Some highlights of the quarter include, Tektronix is executing on robust backlog in power and digital test and measurement solutions and delivering low single-digit core growth and outstanding operating margin expansion. This included over 20% revenue growth in North America, reflecting continued customer investments to solve the proliferation of new power design challenges for batteries, EVs, and industrial applications. Tek orders continued to normalize off a 40% 2-year stack at the end of 2022. Double-digit order declines at Tek were greatest in China. However, we did see weekly patterns improve sequentially as we moved through the quarter. Further, we expect continued lead time improvement and channel normalization, with orders returning to growth in the coming months as customers continue to prioritize investments in semiconductor advancements, AI-enabled compute, and electrification of everything. Sensing Technologies saw another quarter of strong orders and revenue growth at Qualitrol. This included a meaningful deal in the quarter from a large U.S. utility customer for full transformer asset monitoring solutions. Elsewhere in Sensing, slowing in China was reflected in lower-than-expected orders and revenue. Lastly, Pacific Scientific EMC reported another quarter of double-digit sales growth as it benefits from Kaizen activity to improve manufacturing capacity and operational execution to deliver on record backlog. Moving now to Slide 10 and Advanced Healthcare Solutions. Core revenues were up 2%, reflecting improved underlying sterilization demand, partially offset by higher than expected U.S. channel inventory in ASP. For the third quarter, the total impact resulted in $11 million in less revenue, impacting AHS core growth by over 300 basis points and adjusted operating margins by almost 200 basis points. Elsewhere, high-growth markets saw revenues up high single digits, driven by robust growth in Latin America as well as good growth in Asia. Adjusted operating profit margins increased by 200 basis points year-over-year. We are seeing traction on pricing actions as well as the benefits of the productivity initiatives reflected in higher margins. Additional highlights in the quarter include Census continued to grow its subscription revenue with its Censitrac SaaS business increasing mid-teens, benefiting from continued traction in both new logo expansion and cross-selling opportunities as customers standardize on their leading instrument tracking software solution. Blue Power Solutions revenue increased slightly as high single-digit growth in its core dosimetry business was partially offset by project timing. We also saw continued market weakness in Invetech, accounting for approximately half of the slower than expected growth in the segment in the third quarter. Lastly, Provation had another quarter of excellent growth, over 20% driven by continued APAC SaaS adoption and new logo success. Previewing the fourth quarter, the ASP channel transition is now complete, and we expect growth to accelerate in EHS. This includes the initial ramp of ASP’s recently launched portfolio of steam sterilization monitoring products, which will further build over several quarters as they expand their global reach. We continue to expect margins to ramp in Q4 and 2024, driven by consumables growth, price realization, and productivity actions. With that, I’ll pass it over to Chuck, who’ll provide more color on our third quarter financials and our 2023 outlook starting on Slide 11.

Thanks, Jim, and hello, everyone. We generated year-over-year core revenue growth of 2.5%, which included single-digit growth in North America. As Jim mentioned, we saw over 20% growth in Tektronix and acceleration in our software and recurring revenue streams, which more than offset moderation in some of the Sensing businesses. Western Europe revenue was up slightly as growth in software was offset by normalizing growth in hardware products. Asia saw continued strength in India, up mid-teens and Japan up high single digits, which was more than offset by a low double-digit decline in China. We had anticipated growth in China would slow in the second half as we lapped outside growth in prior years. For example, Tektronix was down over 20% in China in the quarter. However, it was still up 20% on a 2-year stack basis. We also saw continued slowing in Sensing, given the current macro environment, while AHS grew high single digit as electric procedure volumes improved in the quarter. Turning to Slide 12. We show operating performance highlights for the third quarter. Adjusted gross margins increased 160 basis points to a record 59.7%. On a 2-year stack basis, they are up an impressive 240 basis points driven by the benefits of our portfolio evolution, the continued application of FBS initiatives, and strong price realization. Adjusted operating margins expanded 150 basis points to 25.9% or 300 basis points over the last two years, reflecting higher gross margins and the benefits of the productivity initiatives we executed earlier this year. Adjusted earnings per share increased 8% to $0.85 despite higher year-over-year interest and tax expenses. Earnings are up 30% on a 2-year stack basis, and free cash flow was $384 million, reflecting a 25% increase over the prior year and over 50% growth in the last two years as we continue to grow earnings and effectively manage working capital. Turning now to the guide on Slide 13 and the outlook for the remainder of the year. For the fourth quarter, we are adjusting our range to reflect caution around the macro in China and delayed recovery in Invetech. Core revenue growth is expected to be in the range of 1.5% to 3%. Adjusted operating profit margins are anticipated to increase by approximately 150 basis points, and adjusted diluted earnings per share are expected to be in the range of $0.92 to $0.95, representing 5% to 8% growth and includes $5 million of one-time additional corporate expenses related to the remediation plans following a cybersecurity incident in early October. We also plan to proactively fund an incremental $35 million of productivity initiatives in the fourth quarter, which are excluded from our adjusted EPS outlook, with accretive benefits expected in 2024. Finally, we expect free cash flow of $415 million, representing conversion of approximately 125% of adjusted net income. Turning to the full year recap. We are reiterating the midpoint of our earnings guidance for 2023, which is coming in at the high end of the outlook we set at the beginning of the year. Things have largely played out as we expected having some upside driven by secular tailwinds driving market expansion in new customer innovations, resiliency of roughly 40% of recurring revenue, elevated backlogs, and carryover pricing in our hardware products businesses buffering moderating demand as order rates normalize throughout the year. As a result, we have core growth and margin expansion in each of our segments. Core growth for the year as reported is now expected to be approximately 5% with adjusted profit margins anticipated to increase approximately 150 basis points. Adjusted diluted earnings per share is now expected in the range of $3.37 to $3.40, having raised our guidance twice in the year, and we continue to expect free cash flow of $1.25 billion, representing a conversion of 105% of adjusted net income and 21% free cash flow margin. With that, I’ll pass it back to Jim to provide some closing remarks.

Thanks, Chuck. I’ll start to wrap up on Slide 14. Consistent with 2023, we believe we will see sustained core growth and robust margin expansion and free cash flow growth in 2024 despite the evolving macro environment. What continues to differentiate Fortive is our ability to deliver mid-single-digit through-cycle growth, reinforcing our portfolio durability and the power of FBS to deliver strong margin expansion. The consistency of our execution reflects the strength of our product vitality and alignment to high-growth secular trends, continued solid customer demand in the buffer of excess backlog, adding to a resilient growth profile. In healthcare, we expect a continued modest pace of industry recovery to drive stronger growth and incremental margins as we lap discrete 2023 headwinds. Lastly, in software and other recurring, our efforts to increase demand generation and strengthen our go-to-market capabilities is expected to drive strong SaaS and license revenue growth in 2024. This brings me to Slide 15 and how we drive differentiated performance and value creation for our shareholders. As we finalize 2023, we are demonstrating another year of strong execution, delivering record gross margins, operating margins, and free cash flow. The sustained results underscore the power of the Fortive Business System to relentlessly drive continuous improvement throughout our portfolio. As we showed at our Investor Day in May, by executing the Fortive formula, we expect to roughly double our earnings per share and generate more than $8 billion of free cash flow over the next five years. Our acceleration of capital deployment, as demonstrated this quarter, further positions Fortive as a higher-growth cash flow compounder and a premier company delivering exceptional value to shareholders. With that, I’ll turn it back to Elena.

Thanks, Jim. That concludes our formal comments. Krista, we are now ready to take questions.

Hi, good morning. Maybe just wanted to start with the Precision business, just how the guidance sort of has moved around Tektronix. So it seemed like the test and measurement market was getting worse a few months ago, and you raised the Tektronix revenue guide for the year and now it has come down. So maybe just help us understand, was it simply China suddenly getting very bad in late Q3 that caused such a revision? And maybe give us some context now with that PT segment being down organically in Q4, what sort of history tells us the duration of that sales downturn should be for the PT segment?

Good morning, Julian, it’s Jim. I agree with your assessment. We're currently at a level similar to where we were previously. For Tek, I expect high single-digit growth for the year. We noticed a slight decline in China, although the two-year strength remains robust. In the third quarter, we experienced around 30% growth on a two-year basis. However, there was some inventory buildup and caution from several distributors and direct customers across China, which seems to be more broad-based than industry-specific. Caution appears to be the main factor here. We also had some large orders pushed out. The conversation surrounding Tek is primarily about China. On a positive note, recent PMIs and a declining semiconductor index suggest we are moving towards normalization, a view we have consistently maintained. I anticipate that Tek's orders will improve in the fourth quarter compared to the third, with our 90-day funnels appearing more favorable than before. Point of sale data from various regions, particularly North America and Europe, looks promising and is expected to remain strong. China's point of sale was also quite decent in Q3. Overall, I believe the downward trend in China during the third quarter is likely at its lowest point and should start to improve as we approach year-end.

Thanks. And then any broad thoughts on sort of PT overall? You’ve got down organic sales this quarter. How quickly are you assuming that flips positive?

Yes. I think what we’ve been talking about strategically around PT has been that we thought we’ve done a lot of work in Tek to try to move that growth rate and make it less cyclical. Our service business, as an example, in the third quarter, was up 3%, which is, I think, a good environment relative to sort of stabilizing the business a little bit. We haven’t done as much work in Sensing. We’ve called that a low single-digit business. And as you know, we’ve had double-digit growth there for a couple of years. So we anticipated that normalization there. I think what we’ve seen over the last sort of 60 to 90 days is what I would call more slowing. And so the PT number really in Q4 is really around Sensing. Some of that’s China, some of that’s some direct OEMs that have pushed out blanket orders into 2024. Typically, some of that is our lead times coming down. Some of that, I think, is a little bit of slowness. We talked about it on the second quarter call, automation, principally in Europe, that continues. HVAC U.S. and Europe, also a little slower. And then as I mentioned, China. So that really is the PT story in the fourth quarter relative to kind of the change in the guide.

Thanks. And just one very quick follow-up, healthcare. It’s been a sort of a litany of issues for a few years. Once we get through the channel transition, which it sounds like that’s finished, do we get back to sort of mid-single-digit-plus growth in 2024? Is that the sort of natural entitlement as you see it without any one-time negatives?

We will refrain from providing guidance for 2024, but I believe we will certainly experience mid-single-digit growth. To give you some context regarding our average selling price, we flagged approximately $10 million related to the channel transition, which was about $6 million more than our expectations in the third quarter. This situation is part of why we chose to adopt a direct approach, mainly due to the uncertainty surrounding natural demand. If we exclude adjustments for channel inventory from the second and third quarters, we observe mid-single-digit growth over a two-year period in the second, third, and fourth quarters, indicating greater consistency. There is some noise that we would have preferred to avoid, but as we approach the fourth quarter, with the channel challenges behind us, we feel confident about our position. Although we experienced a bit more disruption than anticipated, we believe we are now strategically in a stronger place, which will help us in 2024. Additionally, we saw a margin expansion of 200 basis points in the third quarter, reflecting continued improvement even with slightly lower revenue. Overall, this sets us up for a solid entry into the fourth quarter and positions us well for what we anticipate will be a better 2024.

Great. Thanks so much.

Thank you, Julian.

Hi, guys. So just on the hardware backlog you guys have talked about in the past, where do we stand on all that, the one that was like $350 million at one point? What’s the status of the hardware backlog?

Yes, last quarter, we aimed to increase from $330 million to $350 million. However, I believe it's come down since then, which I think is a fair assessment. We initially thought we could end the year around the $200 million range, as I mentioned in the second quarter. Now, it looks to be more in the $100 million to $150 million range, depending on the order rate. Some of this decline is due to blanket orders that have been pushed into 2024, so the decrease isn't as significant as it might seem. Nevertheless, we still have an excess backlog of over $100 million. It's less than we expected, mainly in Sensing and a bit in Tek related to the situation in China, which ties into the conversation regarding previous questions. As it stands now, we still have a backlog exceeding $100 million, not counting EMC, which has a substantial backlog. Thus, I feel we still have a safeguard going into 2024.

And then what happened at Invetech? Can you just maybe discuss a little more of the drivers of that business for the quarter?

Yes, that business primarily focuses on design, engineering, and manufacturing for the diagnostic and bioprocessing market. Over the past few days, we’ve observed a decline in that area. We initially believed that our expectations for the second half would mark the lowest point for us, but it appears that we were mistaken and the situation has deteriorated further. We have adjusted our outlook accordingly. However, we acknowledge that we were somewhat overly optimistic. It's important to note that this market is not a core healthcare segment, which primarily revolves around hospitals. Currently, we have seen some customers delay projects until 2024, which is reflected in our updated guidance.

One last question for you. Does this seem recessionary to you? And do you have a strategy for managing costs? If so?

Yes, thank you for the question. I’m not sure yet if we are seeing a full recession. There have been four quarters of PMI being low, and other indicators of industrial production also show some slowdowns, which we’ve observed in certain order rates over the past couple of quarters. However, we are still aligned with our original guidance for the year and have prepared for some slowdowns. This preparation has allowed for strong margin expansion in the second and third quarters, even with slightly lower revenue. As noted in our prepared remarks, we have adjusted our productivity expectations, perhaps out of caution to be ready for any situation. We still anticipate a positive outlook for next year. Many aspects of our strategy are playing out well, with software performing strongly in this quarter and our services businesses also doing well. Fluke appears to be in a good position, potentially better than if we were facing a recession, with their sales being solid. Therefore, while I won’t definitively say we are in a recession, there are areas of concern, and we remain prepared.

Great. Thanks a lot.

Thank you, Steve.

Can we just kind of maybe come back to Tek first? So orders are down in the quarter, but you’re expecting them to inflect positively in Q4. Can you just maybe elaborate on what’s driving that or is that just the comps now moving the other way? Like what kind of visibility do you have on improving orders at Tek?

We have observed a decline in Tek orders over the past few quarters, which can partly be attributed to comparison issues. While there has been some slowing, the two and three-year comparisons remain robust, and we are working from significantly high raw order dollar amounts, which have been unprecedented for our company in recent years. Consequently, this decline may be more about comparison than anything else, as we began to notice a slowdown in the fourth quarter of last year. Additionally, there are slight signs that conditions in China might be improving, although I wouldn’t describe the situation as good—just a bit better. We have also experienced some orders being pushed from the third quarter to the fourth quarter, and we anticipate seeing these effects as well. Most of the decline relates to the comparison, and we're not expecting a major improvement. However, there are some indicators that suggest the situation could be improving slightly, which is reflected in our current outlook.

And on this inventory realignment in ASP. So you misjudged it a bit in Q3. Like what is your kind of visibility that you totally understand what’s in the channel, and we don’t have some additional hangover into Q4 or maybe there’s some hangover baked into your Q4 numbers still?

Hey Jeff, this is Chuck. No, we don’t have anything planned for Q4. We have completed shipping to the distributors, and we’re confident we’ve addressed everything. The situation was larger than we anticipated, which is one of the reasons for the change we decided to make. We wish we had properly assessed it from the start. However, there is nothing expected for Q4. We anticipate the average selling price will be in the mid-single digits in Q4.

And maybe just a quick one. This cyber issue, is this totally wrestled to the ground, or do we have some kind of open-ended issue we’re dealing with there?

Yes, we experienced a disruption in our network infrastructure due to what we are referring to as a cyber incident this quarter. We mentioned some costs associated with mitigation, approximately $0.01, which totals around $5 million included in our guidance. We did encounter some downtime at certain North American facilities, but they are now operational again. We believe we can manage the situation effectively. We have contained the issues, mitigated them, and completed the investigation. We are now in the process of implementing the final remediation measures. Therefore, we do not think this incident will have a significant impact on the quarter. That is our current status.

Right, thank you.

Thank you. Hi, everyone. Can we start with the EA acquisition? One of the things that struck me in the release is you talked about how you want to leverage the Tektronix franchise. And maybe just kind of elaborate on that. Is it distribution? Looking at their products, there are a lot of similarities in terms of benchtop, but it doesn’t seem to me there’s a lot of product application overlap and maybe I’m wrong there. So how does leveraging the Tek franchise play out here?

Yes. There’s not a lot of product overlap, Deane, you’re right, but there is a bunch of application overlap. We’ve talked about the power market at Tek for a number of years and how that’s really been driving growth even in the quarters we were just describing, we continued to see strength. And that’s really been on the backs of our mainstream oscilloscopes and probes and our sourced measuring units. Almost in every one of those applications is also an EA-type product, if you will. So we will 10x their go-to-market. They were mostly direct in Germany and parts of Europe, mostly with distributions in countries around the world. We’ll 10x that with our own go-to-market from a capability, both direct and channel capability. We think that’s a tremendous leverage point. It is at the call point we’re at and we see a lot of those applications relative to seeing EA right there in many cases or, in many cases, seeing others and understanding that we can be a partner to EA in that regard relative to the go-to-market. So we feel good about the synergies. It’s obviously a very good business. It’s had very strong growth. It’s got software-like growth and software-like margins. We think we can really help accelerate the continued market expansion of the product lines.

Great, that’s good to hear. And then just as a follow-up in some of the themes about what are you seeing that might be recessionary or not, two areas I’d be interested in hearing, the typical Fluke sell-in versus sell-through, how that is the cadence there? And then broadly, the cadence for the quarter, if you broke out revenue growth or orders, how did it play out in the quarter by month? And did you exit in a more deteriorating fashion or not?

Yes, when we consider Fluke POS, North America serves as a good reflection of the U.S. economy. The performance was fairly steady, although the point of sale results were consistently strong. It's important to look at two-year comparisons since fulfilling backlog over the past 12 to 18 months can skew the results somewhat. Overall, the performance has been quite stable. In China, things were somewhat slower as we progressed, but we have a solid grasp of the situation there, and this encompasses the broader market and not just Fluke. Regarding Tek, their order growth actually improved in September compared to the beginning of the quarter. However, we did notice some fluctuations towards the end of the month. The most significant shift in our outlook for the second half relates to a more focused view on specific OEM customers within Sensing, particularly in the markets I mentioned and in China. These were the two main changes we observed.

Great. Thank you.

Thank you.

I guess a question on PT and the decision to sort of buy EA. I think for years and we’ll have Tek. But it was like one of the acquisitions back at Danaher; this is the one that didn’t go well. And there were questions, and all of a sudden, there’s a lot of attention being paid to it, right? Press report at NATI, clearly, you’re making a bet here with EA. Can you just talk about the evolution of the company’s thinking about sort of Tek and how you’re thinking about the business overall? Where this is all of a sudden a key area for capital deployment? And what it is you’re seeing two, three years down the road that gets you excited?

Thank you, Andrew. First, looking at Tek's past returns, they're strong. Yes, we faced some challenges initially, but that's behind us now. Current returns are solid, and we’re confident in the business’s performance and profitability due to our strategy of stepping away from more volatile sectors, like the video business, and shifting focus towards services, which tend to be more stable and create higher attach rates. This shift has been evident over the past few years. As a significant part of our company, we have strategically emphasized that the power market presents great opportunities for us, driven by long-term trends in electrification, which extends beyond just electric vehicles to include storage and renewable energy, addressing the challenges for the grid, data centers, and storage solutions. We’ve seen remarkable success in these markets recently, particularly with our mainstream oscilloscope line. This success naturally leads to what we're seeing with EA, which represents a high-value growth opportunity that will immediately enhance Tektronix’s growth and profitability. Many industry colleagues have praised this deal, and while we continue to engage with stakeholders for better understanding, the financial and strategic advantages of this acquisition are clear. We believe it significantly adds value to Tek and are excited about its implications not just for 2024 but for the overarching potential it brings to our business. As we shared our 2028 goals for earnings per share and free cash flow, EA contributes about 30% to 40% of our M&A EPS target, based on our current trading multiple. We're very optimistic about the deal and the opportunity to integrate such an exceptional team into Tektronix and PT.

And just a follow-up on just software, but specific, I guess, facility and asset lifecycle, right? We sort of slowed down to high single-digit growth. And I apologize if I missed it, but what were the key headwinds that sort of took it down from double digits to high single digits? And how much visibility do we have on this business re-accelerating into year-end and into 2024? Thank you.

Yes, I believe FAL is performing very well. It represents a great aspect of the IOS margin expansion we've experienced. We’ve seen strong year-to-date growth in IOS margin expansion, and FAL is an important part of that success. There has been some slight moderation in Gordian, but it's really a reflection of an exceptional first half rather than actual slowing. The business is in its best position ever. Overall, ServiceChannel is on an excellent path. We highlighted several positive developments in Accruent, and I want to emphasize that we have a strong outlook for FAL. We are confident about our current situation, which sets us up well for 2024. The business is progressing effectively.

So 10%-plus is still a good place to hold for this business long term?

Yes. I think we’ve indicated a range of high single digits to low double digits, and it may vary. There is some nonrecurring service business that comes into play occasionally, which affects comparisons. But yes, it’s likely to be in the range of 9% to 11%, which you can expect for strong performance in the coming years.

Thanks so much.

Good morning, everybody. I got disconnected earlier so if someone asked this question, I apologize. But can you clarify on this channel adjustment going direct? Is there a margin payback? I would imagine you capture some of that margin that distributors were getting, but are we going to see that in the numbers? Or did you have to add costs in proportionately to that change?

Scott, this is Chuck. Yes, there’s a margin component to that. It’s about 7% on the revenue that was going through the North America distributor. And you’ll start to see that show up in price in Q4.

Okay, good. And when you guys think about kind of your pricing strategy, I imagine it’s dynamic by SKU, but is this new world we live in one where you can go out every January 1, you think, with some sort of placeholder price increase and capture it in the marketplace? Or is that not how to think about it?

No. I think we probably have several dates. When considering the hardware businesses, we’ve experienced unprecedented prices over the last few years, but we will continue to have good prices. We view it as value capture rather than just price. We focus on our innovation capability, and if we can enhance our innovation, we will ultimately be rewarded with better gross margins. Our gross margin trend over the last few years not only reflects well on FBS but also showcases our innovation and our ability to introduce products that offer significant value. I believe the pricing environment will be better going into 2024 than usual. However, I wouldn’t say it’s better than 2023; I would simply say it’s better than normal. We plan to keep seeking pricing opportunities, which you’ll notice a bit on the software side and in our net dollar retention. Our pricing metrics relate mainly to the hardware businesses. As Chuck mentioned, we’ll see a bit more price increase in healthcare, which has been growing over the past few quarters, and we expect that trend to continue into 2024. There are several factors that make us optimistic. While we’re not providing guidance for 2024 just yet, we are hopeful that we can achieve further price increases.

Super helpful. Best of luck for the rest of the year, guys.

Yes, thanks Scott.

Hi, guys, good morning. So just on the 4Q, just mathematics here. Look, obviously, $0.01 on corporate with the fiber. It seems like it’s like maybe $0.01 or $0.02 on FX. Just maybe just confirm that, that move in FX about $0.01 or $0.02 on 4Q. But I’m just curious on Tek there’s obviously a pretty weak forward guidance from them. And I think we’re trying to all figure out whether this is deterioration in short cycle demand or whether consumers of chips like yourself are just destocking. You’ve been obviously holding buffer inventory and destocking. So any perspective you have on that, Jim, would be helpful.

Nigel, I'll take the first question. I believe there is a slight impact from foreign exchange in the fourth quarter, likely a bit less than $0.01. However, there are some effects to consider. Additionally, you mentioned there is $0.01 in corporate costs related to remediation efforts on the site.

I think I understood your question regarding TI and inventory in the channel. While I may not have caught everything, I did read some information on it. From Tektronix's perspective, the primary area where we noticed inventory correction was in China. We monitor inventory levels and expect some reduction in China over the next few quarters. I wouldn’t say we are experiencing elevated inventory levels as demand decreases and lead times shorten. We are working with individual channel partners regarding inventory management. Overall, we believe we are in a good position with our guidance on this matter. The main factor influencing this is the demand outlook, and we feel we have accurately assessed that demand. The order projections I mentioned earlier reflect the regional complexities relevant to Tektronix. If my response doesn’t address your question, please let me know.

No, no, I’m just curious if you were like taking down ship inventories in particular, but...

I was looking down our inventory. The one thing about us, and you know this because our working capital performance has been so good. We really didn’t build a lot of inventory into the company. We certainly will be taking actions on inventory, given our revenue guide for the fourth quarter is a little different than it was. So we’re certainly working on that. But in terms of having big inventories on our own, we haven’t necessarily been building big inventories. That’s the sort of lean manufacturing, quite frankly. So sorry, really good question.

No, that’s right. Yes. And then my follow-up question, I think this is a quick one. I thought Slide 14 was a good slide showing the variability in revenue growth, but ultimately, around a mid-single-digit type of growth rate. And 2024 was sort of to that. So I’m just curious, does the same thing, as we frame 2024, does the same apply to incremental margins? And the spirit of the question is you’re coming off a really big year for incrementals. So I think we’re north of 60%. Does that mean that 2024 might be sort of below natural levels? Or are you confident you can build on 2023 margins in the 40%, 50% range, perhaps?

Nigel, a couple of things to think about as 2023 margins are very good. And normally, we’d think about 40% incrementals, and I think it’s been 60%. That has to do with more with the productivity things that we did early in the year. And then you saw us do some more. So no, we would always expect 40% incrementals moving forward. And then it will be a little bit more elevated because of the actions that we’re taking right now. So we will build on what we’ve done here, and we would expect them to be elevated from what they would be because of the actions that we’re taking here in the second half.

And Nigel, regarding core growth, I hope that slide is helpful because what we really indicated is a mid-single-digit growth rate through the cycle. After a couple of years of growth around 10%, we expect some normalization. We’ve discussed this for three quarters now. We're observing a consistent trend in the second half of the year, though there are slight differences in Sensing and China compared to our previous discussions. However, we're witnessing that normalization in the latter half of the year, which aligns with our expectations for a mid-single-digit growth rate through the cycle. Moreover, as Chuck mentioned, our preparation has enabled us to achieve significant margin expansion, even with a slowdown in the second half of the year due to how we operate the business.

That’s great. Thank you.

Thank you.

Good morning, everyone.

Hey Andy.

So I think one of the keys for ASP as you go into Q4 2023 and 2024 is consumables coming back and being relatively strong. I think you’ve talked about underlying elective procedures improving. I would surmise that’s the case in the U.S. and I guess in China at this point. But what is your visibility into the consumables ramp-up, and if anything, would stop ASP from recording the stronger consumables demand?

So Andy, a couple of things just from elective procedures, generally in Q2, we thought we were 95% around the world. A little bit slowed in China because of the anticorruption stuff probably did 90%. But definitely improving around the world. We do have this inventory adjustment transition in North America. But when you look through that, the actual consumables growth is already there. It’s there in Q2 and Q3 when you understand how the customers are using our products. And that’s where when Jim talks about the 2-year stack, we’re up 8%, 9% from Q2, Q3, Q4 rather consistently when you just take that one thing out. So we think we’re already seeing that and what’s actually going to use it. Let me stop there and see if that made sense.

Yes. No, that totally makes sense. And then maybe just shifting gears, Jim, could you talk a little bit more about how you’re thinking about M&A now? After the announcement of EA and you had the three small bolt-ons, how are you balancing thinking about the higher rates environment in terms of your own M&A strategy? And should we expect a higher tempo of M&A from Fortive over the short to medium term?

Well, during our Investor Day in May, we aimed to highlight the opportunities ahead of us. I consistently communicated that we have been proactive. In the second quarter call, I mentioned that I anticipated progress in the second half of the year, and by that point, I had a good sense of several deals in the pipeline. We've been engaged and actively seeking unique opportunities. While many were expecting significant price reductions, we've observed several peer companies paying strong prices. We managed to identify unique opportunities, such as our three bolt-ons, including Azima, with whom we have a long-standing relationship, and Solmetric, a solar tool company. These are distinctive opportunities that extend our product offerings with high returns on invested capital. Similarly, the acquisition of EA is a business with which we are well-acquainted; they are well-regarded in the test and measurement sector for their technology and expertise in high-growth applications. We will continue to seek out similar opportunities that present themselves. Our approach will focus on ensuring substantial returns, which is what you will observe moving forward. We've indicated that demonstrating these outcomes can be challenging to predict, but sometimes they occur in clusters, as they did this quarter. We will stay active in pursuing opportunities that resemble what we've experienced recently, aiming for high return prospects.

That’s great, Jim. And Chuck, just to sort of follow up on my first question. You don’t need a consumables ramp up to make your Q4 margin, right? You already have it. It’s just the other thing getting better?

Yes, that’s exactly right.

Yes, thanks, everyone.