Fortive Corp (FTV) — Q3 2024 Earnings Call Transcript

Thank you, Brock, 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 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, 2023, and quarterly report on Form 10-Q for the quarter ended September 27, 2024. These forward-looking statements speak only as of the date that they are made, and we do not assume an 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. Our third quarter results showcase strong execution across our businesses, allowing us to deliver earnings and free cash flow at the high end of our guidance with 14% adjusted EPS and 12% free cash flow growth on 3% revenue growth. Our profitable growth reflects our dedication to building a high-quality portfolio, innovating with new products, delivering more value to customers and our dedication to the Fortive Business System and culture of continuous improvement. Our leadership positions across durable growth markets are reflected in upside performance in Advanced Healthcare Solutions and continued growth in Intelligent Operating Solutions. We're pleased with the positive momentum and double-digit orders growth at Precision Technologies. Our updated outlook continues our track record of compounding earnings and free cash flow growth by double digits in 2024 while maintaining a balanced perspective on our end markets as stabilizing demand trends drive sequential improvement as we move through the remainder of the year. Looking forward to 2025, we are poised to accelerate our strategy and ensure consistent value creation as we progress toward the spin-off of the Precision Technologies segment. The separation remains on track. And as previously disclosed, we accelerated the pace of share repurchases in the third quarter, reflecting our commitment to value-enhancing capital deployment. So with that, let's take a closer look at our third quarter and year-to-date results on Slide 4 and give you some color on what we're seeing in our businesses. Strong operational execution contributed to record third quarter adjusted gross and operating margins with 60% incrementals in the third quarter on 1% core growth. These results extend our strong year-to-date operating performance with adjusted EPS up 11% and free cash flow up 13%. Turning to what we are seeing across our businesses in the quarter. Our software businesses once again posted high single-digit ARR growth. Hardware orders returned to growth, up high single digit with strong contributions from Fluke and Tektronix. While we continue to leverage FBS to mature our supply chain and increase production capacity to support accelerated demand at Qualitrol and PacSci, we shifted approximately $15 million in shipments out of the quarter. We also saw customers delay spending, including select Gordian state and local customers navigating budget and macro uncertainty. Lastly, consistent with our intent to deploy the majority of our free cash flow to share repurchases between now and the completion of the spin, we bought back approximately 4 million shares in the quarter, bringing the year-to-date total to approximately 6 million. Turning to Slide 5, I will provide more detail on our segment performance and expectations for the remainder of the year, starting with IOS and AHS. On a combined basis, revenues grew 4% with adjusted operating margins up 130 basis points to over 30%, representing another quarter of consistent mid-single-digit growth and robust margin expansion. Moving to the right. Intelligent Operating Solutions expanded adjusted operating margins 50 basis points on 3% revenue growth, approximately 2% core. Acquisitions and FX were both favorable. Additional highlights include booked revenue was up low single digits in the quarter, driven by new product innovations; and continued success of recent bolt-on acquisitions, partially offset by customer shipment delays. Leveraging FBS innovation tools, Fluke launched five major new products in September, a record month for NPIs, extending their leadership position in solar and energy storage tools. Orders at Fluke were up high single digit with improving trends in most regions. Segment ARR growth was high single digit, driven by mid-teens growth in eMaint as well as traction on upsell and cross-sell revenues in FAW, driving an acceleration in SaaS growth and meaningful improvements in net dollar retention. For example, the Accruent and RedEye product integration teams are accelerating customer transitions to our cloud-based engineering document management solution. FAW is also seeing good traction on the recently launched Gordian Cloud Platform, driving new logo velocity in K-12 and higher ed growth markets. For the full year, we expect IOS to deliver mid- to single-digit core growth with approximately 100 basis points of adjusted operating margin expansion. Advanced Healthcare Solutions expanded adjusted operating margins by over 300 basis points on 8% revenue growth or 9% core, partially offset by unfavorable FX. Key growth drivers include double-digit consumables growth as expected. We had upside from strong capital and equipment sales at ASP and Fluke Health with share gains in select markets and almost 20% SaaS growth driven by Provation. We also had several examples of how our increased innovation velocity is contributing to core growth with a pipeline of new products, including ASP's release of their new ULTRA GI Cycle designed to reprocess duodenoscopes using hydrogen peroxide gas plasma sterilization, which significantly improves the safety of patients and technicians as well as the environment. ULTRA GI Cycle was developed in partnership with PENTAX Medical and will be ramping sales in Q4. ASP is also expanding the launch of its steam monitoring biological indicator, making it now available in over 30 countries. Looking ahead, Provation just launched the next phase of Apex Insights, their proprietary data analytics tool that features real-time data visualization to drive informed decision-making and boost provider productivity. Based on the strength of their year-to-date execution, we now expect AHS to grow mid- to high single digit and expand margins by over 200 basis points for the full year. Turning to the Precision Technologies on Slide 6. Revenue was flat in the quarter with a core decline of almost 4%. Acquisitions net of divestitures contributed over 3 points to growth. Adjusted operating margins were up 70 basis points year-over-year to 26.4% with lower core volumes more than offset by productivity benefits and accretive M&A. Core revenues at Tektronix were down high single digit, slightly better than expected. However, orders were up high single digit after several quarters of decline. Recovery is being led by investments supporting AI applications, particularly from customers like NVIDIA and TSMC. Tektronix is also using FBS innovation tools to expand its addressable market, adding complementary performance solutions to their best-in-class electronic test and measurement suite serving their fastest-growing markets. Next month in electronica, Tek will launch a first of its kind oscilloscope probing technology to enable next-generation power applications. And EA will release an industry-first triple channel bidirectional power supply, supporting new markets with higher test capacity, density and efficiency. We had double-digit growth in Qualitrol and PacSci EMC despite some shipment delays I previously mentioned. Customers are continuing to ramp grid capacity to support the demands for electricity and new sources of energy. And rising defense spending globally in advanced systems development drove another quarter of robust demand at PacSci. Overall, sensing technologies revenues declined low single digit. However, we had good orders growth as demand in certain industrial markets stabilized. As a reminder, we expect PT revenue to be down low single digits on a core basis for the full year with adjusted operating margins approximately flat. Moving to the right-hand side of the slide, you can see the Precision Technologies orders and revenue trends since 2020, which historically were highly correlated. This chart reflects the divergence we have experienced the last three years as orders outpaced revenues post pandemic. With bookings at record levels, we began to burn through excess backlog in late 2022 as order rates declined. Since then, revenue has been normalizing to orders, and stabilizing demand trends overall are driving a return of orders growth in Q3 and Q4 2024, positioning PT for a gradual recovery in the year ahead. Moving to Slide 7 and a look at the regions. We saw continued strength in select end markets and stabilizing market conditions broadly, driving an improvement in order rates as shown in our major regions. For example at Fluke, September POS was positive in all regions as daily run rates in the U.S. and China have been trending upwards all year and rates in Europe started to stabilize. Regional revenue growth in the quarter continues to be driven by our recurring software, services, and consumables businesses in North America as well as double-digit growth in PacSci. We saw sequential improvement in Western Europe, partially driven by easier industrial comps and strong growth at ASP as sales investments in new products in select markets drove share gains. Growth in Asia continues to be impacted by weak demand in China. POS remained stable as customers and partners hold out investment decisions and inventory replenishment. The rest of Asia accelerated to high single-digit growth in the quarter, driven by recovery in semiconductor investments benefiting PT. And India continued to benefit from double-digit growth in IOS and Healthcare. With that, I'll turn it over to Chuck to talk through our updated fourth quarter and full-year guidance.

Thanks, Jim, and hello, everyone. Turning to our Q4 and full year outlook on Slide 8. For the fourth quarter, we anticipate consistent performance to Q3 and year-to-date with revenue growth of approximately 3%, 1% core at the midpoint. This includes strong recurring revenue growth at IOS and Healthcare, and the expectation that continued customer and macro uncertainties will shift recovery in select markets to 2025. Adjusted operating profit is expected to increase 6%, driving approximately 75 basis points of margin expansion. And adjusted diluted EPS guidance is expected to be in the range of $1.11 to $1.14 with free cash flow of approximately $425 million. For the full year, growth is expected to be approximately 3%, 1% core. Adjusted operating profit margins are expected to be up approximately 100 basis points year-over-year with roughly 60% incremental margins, reflecting the quality of our portfolio and the proactive restructuring we did coming into the year. Further, we plan to fund additional productivity initiatives in the range of $20 million to $30 million in the fourth quarter, benefiting 2025 and beyond. We are raising the full year adjusted diluted EPS range to $3.84 to $3.87, up 12% to 13% year-over-year. This, coupled with our free cash flow of approximately $1.4 billion, continues our track record of compounding earnings and free cash flow every year, which are up 14% and 17%, respectively, over the last five years. And now I'll turn it back over to Jim.

Thanks, Chuck. I'll resume on Slide 9. While it's too early to provide formal guidance for 2025, we are encouraged by stabilizing trends we are seeing in our markets. We expect continued momentum in our recurring revenue businesses which will contribute to higher core growth next year. As discussed, the orders growth we are seeing in Precision Technologies is supportive of a gradual recovery through the year, recognizing the potential for ongoing geopolitical and macro uncertainties. The durability of the portfolio and the power of FBS will continue to drive results, with increasing contributions from our innovation efforts, including the many exciting new product launches I highlighted on today's call. Further, with improved core growth, continued strong operational execution and the benefits of the productivity initiatives Chuck referenced, we are poised for another year of strong incremental margins. Lastly, as we announced in September, we intend to deploy approximately 75% of our free cash flow generated between now and the separation to share repurchases, providing a further tailwind to EPS growth in 2025, partially offset by the potential for tax rate increases across the world, providing a headwind to our overall effective tax rate for next year. I'll wrap up now on Slide 10. We remain committed to delivering for shareholders, and our third quarter performance once again underscores our relentless focus and execution to drive resolve. As Chuck referenced, our consistent execution has resulted in differentiated double-digit adjusted earnings and free cash flow compounding over the last five years, demonstrating our ability to profitably evolve our portfolio to deliver in any environment. We are progressing well towards the actions we announced in September to accelerate our strategy and shareholder value creation. Olumide, Tami, and I have had the opportunity to meet with many of you over the past couple of months. We are seeing strong conviction in the compelling investment profiles of Fortive and PT NewCo, both of which are strategically well positioned for growth in 2025. I'm happy to share that the ramp-up work to execute the spin transaction is in place, and all functional teams and deliverables are on track as planned. Our team's dedication to innovating for customers and creating exciting growth opportunities for our businesses underscores the collective ingenuity of our team members and the power of our culture and shared purpose: Accelerating progress for customers, shareholders, and each other. As a result, the best is truly yet to come. I could not be more excited for the future as both companies are well positioned to deliver enhanced value for all our stakeholders. With that, I'll turn it to Elena.

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

Hi Nigel, you there?

Yes. That'd be the mute button. Thanks guys. Appreciate the time. Obviously, you haven't got to be a math genius to figure out what the 4Q buildup is by segment. Just want to make sure that we're thinking about the moving pieces the right way. So 5% AHS, down maybe 2% PT, up maybe 2% IOS. Is that in the right ballpark, Chuck?

Sorry, so you're saying for the fourth quarter, Nigel, on core growth?

Yes, for the fourth quarter, exactly, yes. Just want to make sure that you got that right, yes.

Yes. I think you're in the mid to high-single-digit for AHS. Your PT number is down low single-digit, and IOS is up low single-digits.

Okay, so maybe a bit more growth in AHS?

Yes.

That's great. Yes. And then just on AHS go ahead?

No, go ahead. Go ahead.

No, no. I'm just going to just follow-up on the AHS consumables. It seems that the kind of the strategy of going direct is starting to really come together there. So just wondering if you can maybe just expand on that direct sales channel kind of strategy. And are you seeing kind of the benefit of increased share with some of the customers? Any sort of impact on Provation cross-selling around that? I know that was part of it. And then just maybe just touch on some of the IV shortages we've seen related to the hurricane. Does that have any influence on North American consumables in the fourth quarter?

Yes. Thanks, Nigel. So I would say a couple of things. We're broadly - we're really pleased with the 9% core in the segment itself. As you said, ASP is really executing well. And obviously, the margin expansion in the segment also speaks to the execution. The North American transition has been really strong, and we feel really good about it relative to customer intimacy. I think at this point, I would say it's helping us more on the capital side. We have several good capital wins. I would say one of the nice things we saw in the quarter was also mid-single-digit capital growth at ASP as well. So I think, when you look at the go-to-market, it's not only influencing the ability to sort of get the consumable ramp rate, but it's also helping us on the capital side, probably not yet as much on the Provation side. Provation had a very good quarter. Their SaaS growth was really strong. A number of good conversions, and they've continued to execute. Their growth has really continued to get better through the year. They do have that license software headwind in this quarter, which dissipates, so we'll see improved growth as well in Provation in the fourth quarter. So you obviously have the comp a little bit in the third quarter, so just to be clear, there is a little bit of tailwind from the comp last year at ASP, because of the channel conversion, but execution across the board. Fluke Health was up high single-digits. So just across the board, good execution. Relative to the IV bag situation, we've seen a little bit of headwind in October, a couple of million bucks probably. We'll continue to track that so we're certainly watching it. I think the benefit of the direct movement that we've got now is we know how consumables are going the next day. So we've got much better transparency as to what's going on with North American customers for sure. So I think across the board, you'll see consistent execution. And I think now when you step back, I mean health is the strong story that we were really talking about several years ago, and now you really see the benefits now quarter-after-quarter with our execution capability and just the great job the team is doing.

Great. Thanks, Jim.

Thanks, Nigel.

Hi, good morning. Maybe I just wanted to start with a sort of question around near-term dynamics within the IOS segment. So clearly, some slowdown there in the third quarter. It seems like you're expecting that to kind of hold the line with low single-digit growth still in Q4. Maybe just help us understand, in the current quarter, what we should expect for Fluke versus FAW in terms of organic growth rates? And was the softness in IOS something that happened late in Q3, how is that trending at present? Any color around that, please?

Yes, sure. Thanks, Julian. A couple of things. One, as you said, low single-digit growth in the third and the fourth. But I think when you step back, really, a couple of things happened. One, as we progressed through the quarter, I think what we saw at Fluke was really two things. First of all, I think the good news at Fluke was the IG business actually grew low single-digits in the quarter. So we actually saw, despite some of the PMIs and some of those things, we still saw the industrial business grow. What we really saw was some hesitation on the part of calibration customers. I think that falls into the category of sort of government uncertainty since most of those customers fall into that case. So we saw some of that. And that's really the sort of impact, a little bit of that at Fluke. And I think the second thing is we normally would see a better ramp rate through the quarter. And what we saw just from a lot of our channel partners was the sort of hesitance to take on major marketing programs. We had a tremendous new product launch lineup for the - as we mentioned in the prepared remarks. And we saw really, really strong product innovation and anticipated maybe a little bit of a better take rate on those programs. And we've assumed that, that's just going to continue for the remaining part of the year, that maybe some of the macro uncertainty is going to - maybe a lower growth industrial environment might cause our channel partners to be a little bit more hesitant on those programs. So a little bit of that, that's how we'll continue to think about it, as well as the government customers thinking, about maybe they won't take everything from a FAW perspective, that we've got the orders on. As we mentioned, Fluke had high single-digit order growth in the quarter. So, we feel good about where the order rate is. Point-of-sale got better through the quarter. And I think on a global basis, we had point-of-sale growth throughout the world. So in that sense, I think you're seeing just a little bit of hesitation on the inventory side and a little bit of hesitation on the programming side. In FAW, we had a lot of good in FAW - but it really was going in some jurisdictions and states just decided to not spend as much money on the job side. Our SaaS growth was double-digits at Gordian. So we saw good software growth, but the take rate on some of the procurement really reflected, I think, some of the government uncertainty that might be out there. And we've sort of assumed that, that continues a little bit for the remaining part of the year. We had teens bookings growth at Accruent. We saw good growth in service channels. So we think as we lead into the year, we're going to sunset some of those really, really difficult comps at Gordian as we move into '25. And the take rate, some of the things that we've got going on the bookings side at Accruent service channel sort of really a good setup for '25.

That's helpful. Thank you. And then just looking at Slide 9 for a second on the sort of 2025 initial thoughts. So sort of looking at it all together, is the view that kind of all three segments should see organic growth next year, should have strong incremental margins again helped by the proactive restructuring occurring in the current quarter? And then sort of below the line, any sort of clarity you could provide, as of now on the sort of tax rate? This year is 11%. Kind of what are the ranges of where that tax rate could end up next year? And anything you wanted to flesh out on the operating margin expansion degree?

So Nigel, I'll take a couple of those. Margin expansion and core growth, we would expect organic growth in all three segments next year at this point. We're a long way from giving a guide. But with - when we have mid-single-digit growth, 75 basis points margin expansion is probably what you should look for going there. But with regards to the tax rate, it will go up from where we're at right now, calling it at 11%, probably towards, I'd say at this point, somewhere 13% to 15%, but we've got to get a little bit closer.

Looking at the revenue side, particularly with IOS and Health, the IOS setup related to bookings and software is promising for FAW. We expect continued growth in IOS, which will likely support FAW as the year progresses. Health is also expected to perform well, likely in the mid-single-digit range, contributing to growth. On the PT front, we anticipate a gradual recovery. It's still too early to make definitive predictions, but we saw double-digit orders growth in the third quarter, with 8% growth at Tek, indicating strong order performance for the quarter. We expect this trend to continue, which boosts our confidence in PT growth for next year. However, this recovery might be gradual rather than abrupt, as we transition through the year. As noted earlier, we believe there is a solid pathway to strong earnings, and with the restructuring we've undertaken and our typical productivity efforts, we anticipate favorable incremental growth similar to what we've seen this year.

Great, thank you.

Thanks, Julian.

Hi Scott.

See if we can come back to Scott.

Hi, thanks guys. Good morning. Can we start on EA? You tempered expectations there last quarter. Obviously, the headlines across those markets aren't great right now, even if the business itself is well positioned within them. Like what's the risk of like a lack of a recovery in the future? How should we temper like what we think over the foreseeable future, for recovery of the top line in that business?

Yes, we had - I think we did about $26 million or so in the quarter. We think it will look similarly that - so I don't - we don't have a big expectation of a big uptick here in the remaining part of the year. We've got some backlog that will shift as well. So I think at the end of the day, Joe, we're really thinking. We're seeing good - the synergy work that we talked about last quarter in terms of the small order business continues to do well. We actually had a large order from a utility. So the movement into different verticals away from just mobility, I think we're starting to play out. We had a seven-digit order from a large utility in the quarter. So we feel good about a number of the synergy things we're doing. But as you point out, the end markets relative to EV and mobility are certainly going to be slow. That's been tempered in our - that sort of tempered our enthusiasm around any near-term recovery. We would anticipate that really, I think, consistent with others sometime in the back half of next year and into '26. So that's sort of in our work. Some of our proactive restructuring is to sort of get after some of that. And we feel like a lot of the synergy work we're doing well, and we're executing well. And so that with the return of the market starts, to bring that business back. But it will start to recover through the year, but certainly, I think the big parts of the market, which is probably specific to your question, really, we see as an end of '25, '26 kind of time frame at this point.

Yes, fair enough. And I think you answered my follow-ups kind of in the slides potentially, but I'll ask them anyway. So Fluke was weaker in the quarter, but orders seemed okay. Like I guess most industrial markets are doing way worse than Fluke. So are you seeing any risk of Fluke just lagging those declines? Or do you just feel like that business is - order suggests that business continues to grow from here? And then similarly on Tek, orders are inflecting positive. You had that chart in the slides of that gap. Like does that - if orders stay on this trend, does that flip to revenue positive like what, like mid-next year, 1Q, '25? Like how should we think about that?

Yes. I think we got two very different stories. I think number one, on the Fluke side, as you mentioned, a much more durable company than maybe what people were accustomed to. As I said, in some of the large order business where there's a little bit more capital involved on the calibration side, we did see - that's really the headwind that we saw relative to the second half and the description that we had in the prepared remarks. But orders were better, as you said. Point-of-sale starting to inflect. I would anticipate we'll continue to see growth and that's what we think, but probably more low single-digit growth at Fluke here in the near term. But really good execution. Our Fluke Networks business is growing high single digit as an example, based on some of the data center build-out. So we've got some pieces that are doing well. And as I said, the industrial business continues to perform at low single-digits, which I mean when you think of this environment of the PMI being down for 20 months, the fact that our orders are up 13 of 15 quarters, I think just speaks to the durability of Fluke. It's moving off its mid-single-digit growth trajectory. But obviously, that will come back as some of the - as the PMI and some of the industrial production stuff starts to turn a little bit. Relative to Tek, as you said, orders inflecting, that's a good sign. That's what we've been saying for a couple of quarters now is that, we thought the second half would inflect the growth. Some of that is comps. So we'll - and generally, that's a three to six-month kind of time horizon so we'd start to see some of the impact of that order growth probably in the late first quarter, maybe early second quarter at this point. So we'll see how the second half - we'll see how the fourth quarter plays out. But I think that's how we would see it as we stand today. We've got to get through budgets. We'll see how we finish this year, and we'll see how some of these uncertainties play out that obviously are out there on a global basis.

Thanks, Jim.

Thanks Joe.

Hi Jeff.

Hi, good afternoon everyone. Hi, I hope all is well. Hi, just a quick one first on share repurchase. Maybe you kind of presented the broad strokes here. But looks like you could have done more, right, on your cash balances and what you're expecting here through year-end. Are you dealing with stranded cash in this, what, roughly $800 million, or so I see on the balance sheet? And just give us a little bit more color on what we should expect going forward?

Jeff, no, it's not a stranded cash issue at all. What we did is we looked at the third quarter and we did share repurchases that equated to 75% of our projected free cash flow. Now it came in a little bit stronger, and that's why it's a little bit less. What we'd look to do - we'll catch that up in this fourth quarter. And then probably - and then also look to deploy 75% against our expected free cash flow plus the catch-up. Does that make sense?

Yes, absolutely. And then Jim, just thinking about moving towards spin. You made a comment, I think, about sort of standing up the teams. But maybe elaborate on where we're at with naming rest of the management board, that sort of thing? And is it - are we still on track for the plan as announced? Or now that it's kind of out there, and you've sort of advertised your intentions, there's some additional chatter about other possible outcomes?

I think the key point is that the ramp-up work is progressing well. We have fully staffed our teams for the tasks ahead and are actively recruiting and securing new talent. It's only been six or seven weeks, but we've made significant progress in that short time. Chuck and I reviewed our progress with the team on Monday, and we feel confident about our current status. We're still on track for the fourth quarter of 2025. There are several major events expected in the next 60 days that will help determine if we can expedite things. Overall, we're in a strong position given that we just announced this not even two months ago, and we'll assess where we stand in a few months. However, there are critical milestones that need to occur, such as the Form 10. Regarding inbound offers, we have consistently received interest in various parts of our portfolio and will continue to evaluate any proposals against available options. As always with M&A, we won't comment on specific deals, but we remain open to discussions.

All right. And then just a quick data point. Chuck, can you tell us what price was in the quarter, and what you're expecting for Q4?

3% across the company and we do expect the same level in Q4.

And Jeff, I think one of the good things in the quarter that we didn't say in the prepared remarks, is that we actually saw volume improve from the second quarter to the third quarter. So it was nice to see. It's still negative volume, but the volume is getting better. So I think that just speaks to a little bit of the recovery, we talked about relative to orders, and now we're seeing a little bit of the natural demand play out in a few places.

Understood. Appreciate it. Thanks a lot.

Thank you.

Thanks Jeff.

Hi Scott.

Hi guys, I guess we got disconnected somehow. Modern phone systems we don't know how to use. But hi, this may end up being a stupid question. But as your mix, sales mix shift and Tek changes more towards the guys like NVIDIA, does that - are their needs different? Are they different as a customer for you guys in what they need, how they need it, what they want to pay for it? Just any color on those would be helpful?

No, I would say in the short answer, is they're buying the best technology. And in our case, they're buying some of the high-end solutions that we've developed over time for those specific applications. And so, we were very competitive in those kinds of solutions because they're really tailored to some of the things that the NVIDIAs and TSMCs need for these high-performance data centers, and that kind of thing. So no, there's no margin headwind at all in those solutions.

I was hoping you'd say tailwind but anyways, helpful. Just to drill down a little bit on this customer delay spending thing. Do you sense that some of this is - I mean, there's been macro uncertainty for a while now? So is some of this related to the election and perhaps some uncertainty about policy and tariffs and things like that? And maybe we get a little bit of color on that. We'll have visibility on that in a week or two. But is there - is it more related to that? It just feels like we've had macro uncertainty. You guys have probably commented on that for five of the last six quarters or so?

Yes, I would say it's a couple of things. And I think, yes, I think the quick answer is yes. When you think about the calibration business or you think about Gordian, they're selling into government entities. And certainly, at the state and local level, there was - I think there was more uncertainty as we got closer to the election. A couple of specific jurisdictions, I think we could directly tie to that like New York City as an example, where there's obviously been some issues there. So definitely, some of this is that and that's an acceleration for maybe what we saw several over the last few quarters. As you said, there has been some macro uncertainty for - relative to PMI and things like that, but a little bit more. And I think the other part of it is just the reluctance for inventory has just continued. And I think we thought with some of the promotional activity and marketing programming that we had going. We anticipated a little bit better take rate than we anticipated. And I think that just maybe speaks to maybe our customers' lower growth environment expectations, and now that sort of manifests itself with us.

Okay. Good color. Thank you guys, appreciate it.

Yes Scott. Thanks.

Hi. Good morning, everyone.

Hi Andy.

Just thinking a little bit more about Fortive by geography. You gave us orders this time by region. You just talked to Scott about North America. But mid-teens growth in Europe, maybe that seemed pretty strong, and then Asia up slightly. I think your Q3 orders were against easier comps. But any more color on the regions? And then China continues to look tough for several of your peers, at least in terms of revenue. It was down high single-digits for you. So what are you seeing there?

Yes. One thing to consider is that the global growth of Fluke point-of-sale in September provides some context for our overall situation. We have shared our order details, and there are some easier comparisons in certain regions. Excluding China, Asia saw almost double-digit growth. The challenges we face primarily stem from China. In that region, we experienced a decline in revenue, but health-related revenue was relatively flat. This flat performance in China is fairly commendable compared to the difficulties reported by other healthcare companies. Our consumables revenue seems to be affected by hesitation surrounding tenders in China. Generally, North America is expected to perform the best due to our more stable recurring revenue there, including consumables, software, and the PacSci business. Orders in North America are anticipated to hold up well. Meanwhile, Europe faces challenges with comparisons, although we see strong performance in health. We mentioned this in our prepared remarks and presentation, but I wanted to provide a bit more insight into our observations around the globe.

That's helpful, Jim. And then obviously, going back to AHS for a second, it's been a difficult few years for you up until the last year or so. But given '24's strength and your own self-help in the segment, could you see an extended runway here of higher growth in that mid- to high single-digit range? I know your long-term guide's mid-single digits. But maybe a little bit more accelerated growth and better margin performance out of that. What's the runway in AHS like?

Yes. There was some disruption in the second and third quarters of last year due to the channel transition. However, if we look at a three-year perspective, we are seeing solid mid-single-digit growth and strong margin expansion in the segment. Now that we have moved past the noise, the benefits of our strategy are becoming clearer. While I want to temper expectations regarding reaching high single-digit growth, we firmly believe that a long-term outlook of mid-single digits is realistic and we feel confident about that, especially with ongoing improvements in margin expansion. One positive element we haven't yet mentioned on the call is the new product introductions referenced earlier. We have activated our commercial growth in ASP, particularly in high-growth markets which have been performing well for several years. North America has also been successfully managed over the past year. Our team has effectively utilized the FBS tools to ensure consistency on the commercial side. Regarding innovation, we're now rolling out new products, including expanding the use of biological indicators across 30 countries, which signals that our innovation efforts are gaining momentum. Our Provation launch represents the beginning of our AI initiatives, and we believe we are well-positioned as we observe market developments. For now, mid-single digits seems like a good target for Health, with potentially better margin expansion compared to other areas. As noted, Health margins were strong at 27% this quarter, which reflects benchmarkable performance for our healthcare business, and we are very optimistic about that.

Appreciate all the color.

Thank you.

Yes, I guess good morning to you, Jim. Just to follow up on Jeff's question. You had 2.9% price this quarter. Seems to be quite a bit better than peer pricing of 1% to 2% that we're hearing from other industrial companies. Can you just talk about just overall pricing environment? I know you talked about fourth quarter, but anything structural? Have you sort of rethought your pricing strategy? And how much of this momentum in terms of outperformance is sustainable into '25?

We've consistently maintained a pricing advantage over our peers, which is reflected in our high gross margins. This also explains why our R&D expenses might be somewhat elevated compared to others; we are rewarded for the innovation we bring to the market. I anticipate we will continue to outperform our peers. We regularly reassess our position in the market and explore growth opportunities, as this is fundamental to our innovation strategy. As mentioned earlier, we've achieved significant innovation across multiple areas, and overall, we believe the environment is favorable for innovators like us.

Okay. Thank you. And just a little bit more color on high single-digit core order growth in Tektronix. Is this all green shoots in semiconductors? Just would love to get more color as to what are the other areas that have turned positive?

Yes, I would definitely say that part of it is comparable. What we've indicated is that revenues are increasing, which is positive. We assess this in two ways: the run rate and growth rate, as well as the total revenue figures, and both are on the rise. This is encouraging, as you pointed out. We're beginning to observe some emerging trends. We mentioned some of these earlier, noting that there are investments happening in data centers, batteries, and next-generation electrification. Our customers are looking to introduce new designs and innovations, and we are supporting them with these solutions. This is where we see potential growth occurring across various regions. For instance, we experienced a strong quarter in Korea due to new investments there. Other regions are showing promise as well. While China has remained challenging, we have managed to adapt and continue performing well in other areas. The key aspects of our strategy include electrification, with ongoing opportunities in next-generation government and MilGov sectors, which continue to show strength. We are also starting to see some previously delayed orders from the second quarter come through in the third quarter. Several factors are aligning favorably. Despite ongoing challenges in the broader semiconductor and industrial sectors, we are witnessing positive signs as order rates begin to improve.

Terrific. Thanks so much.

Thanks, Andrew.

Hi, how are you? I guess two questions. I guess what sort of struck me about the quarter was the strength, I guess, in the PT margins, given that organic growth continues to sort of disappoint there. So is there anything that's going on there structurally, the price? Just trying to understand. I don't think we've ever had a margin that high except for maybe a fourth quarter. And then I guess just my second question on the framing to 2025, understanding the spin is going to happen at the end of 2025. And so maybe the question isn't as relevant, but I still think it speaks to the quality of the assets within the portfolio in SBS. Can you frame your - how you think about the historical like sort of 450 EPS number that you guys put out there for 2025, and the different levers that you could pull to get to an EPS number close to that? Thank you.

A couple of things on PT. One is we've got two things going in. We came into the year and we did some self-help at the end of last year, so some restructuring and that's helping across the whole company but also you're seeing that in PT. Also, the EA business is, while not in core, it's in total and those came in with really good margins. I think those are probably the two biggest drivers behind the operating margin expansion you're seeing.

Yes, Jamie, I would say that the 450 was always our target and never intended to serve as a guide. I want to emphasize that. With our revenue now being approximately a couple of hundred million dollars lower than we had expected, we certainly believe we have a strong path to good earnings and free cash flow growth for next year and we feel positive about that. However, we don't want to set a specific target. The main components driving our growth, which we will outline until February, are the IOS and AHS recurring revenue. As I mentioned, PT is expected to grow at a more gradual pace this year. Our incrementals are consistently strong, and this is a fundamental aspect of FBS. Looking back over the past five years, we have averaged 125 basis points of margin expansion, 12% profit growth, and 14% EPS growth. I believe our trajectory is firmly established, and we will observe these trends. But we need to assess where we end up at the year's conclusion. I wouldn't want to set the target at 450 in any form. That was always intended as an aspirational target. Given the circumstances we've encountered in relation to revenue, we anticipate solid EPS growth for next year, but let’s wait to see where we end up at the end of the year.

Thank you.

Thank you. Great day, everybody. This came up a couple of different times but just frame for us what the plan is on this proactive restructuring, and this is above your normal level. And what sense of payback or timing and across which segments? Thanks.

I think it's - we've got a couple of solar places. That's where we're targeting where, I think. And I think the payback we usually talk about is within 1 year. Maybe it's a little sooner than that. We'll give when we get into giving the guide, we'll probably nail that down a little bit.

Okay. This is a more nuanced question, but when you mentioned the slowing decision-making and policy uncertainty, you referred to calibration customers that might be deferred. I may not fully understand that business, but it seems to suggest they have regulatory obligations that can't be deferred for long or there may be warranty issues. When you say some calibration customers are deferring, what specifically are you referring to?

Yes. So we've had tremendous growth over the last several years at Fluke calibration team. Some of it is regulatory, some of it is replacement. I think what we've seen is where we have regulatory decisions or expansions, we certainly are seeing that revenue. But I would say where we have replacement, people are deferring replacements a little bit until they see a number of things playing out. Some of that's in the government and so they're just being a little reluctant to replacement. So we're assuming at this point that, that's going to continue for a little while until we maybe get a little bit more certainty and that's really how it plays out.

Great. Thank you.

Thank you.

Thank you. I think you said previously that in addition to PT orders being up double digits year-on-year, you're seeing sequential improvement in the absolute order rates from Q2 to Q3. I guess my question is, is that primarily or entirely just driven by the military and government orders that got pushed out of Q2 and seems like came through here in Q3? Or are you seeing broader sequential improvement across some of the other green sheets that you mentioned?

Yes, I believe that in areas where we are experiencing significant growth, like Qualitrol and EMC, this growth is genuine and largely driven by industry trends. Additionally, at Tek, the performance exceeds what we've observed from other factors. This contributes to the confidence we've expressed. Furthermore, as I mentioned regarding the growth rate, while it's influenced by comparisons, it ultimately reflects how I described it in terms of dollar amounts.

And then I guess just following up on PT. I certainly understand in the back half year, organic growth is below order rates because you're comping backlog burn as we see on this Slide 6. But as we look into 2025, should revenue at PT grow in line with orders? Just because it seems like 2024 is roughly a 1.0 book-to-bill year so you don't have that kind of backlog burn comps as we go into next year. So any thoughts on that would be helpful? Thank you.

Yes. I think at a high level, we would start to see those growth rates merge. There's a little bit of noise in the EMC business and in the sensing business, when we start to see the larger OEM contracts start to grow. So that could be a little bit different by quarter. But on a full year basis, that tends to mute itself out over time.

Hi, thanks for taking my question. Wanted to - I think you commented that some shipments had pushed from Q3, maybe to Q4 or further in Qualitrol. I think that's been an area of some strength. And so I'm not sure if that's kind of projects and just delays or kind of what customers might be deciding to do there. So any color there?

Yes. Joe, it's really a function of the other to Sensing came in a little slower, and we anticipate getting more out from Qualitrol and EMC than we anticipated. So this is not a customer demand situation at all. They've continued to grow really well. In fact, both of them had, I believe, had record quarters. But it was really inability to countermeasure some of the other weakness. And it was really - so we've assumed that, that probably doesn't happen here for the remaining part of the year. But the demand profile for both those businesses is very strong and should be, and we certainly believe that's going to go well into '25.

And just kind of, is that more supply chain-related and maybe not reaching the potential that you thought you had for shipments there or just any additional thoughts on it?

A little bit of supply chain, a little bit of factory capacity. It's just - it's a little bit of both. I would say on the defense side, a little bit more supply-chain.

Okay. Understood. And then just Provation and that driving the 20% SaaS growth at AHS, are you seeing kind of acceleration there? And just anything when it comes to innovation or end market activity that's supporting that acceleration?

We are really excited about a few things. When we acquired Provation, we indicated that we would begin to see growth from the SaaS conversion because our current licensed software, PVMD, is widely used in hospitals. The transition to SaaS will be a significant part of our innovation narrative, particularly as hospitals adopt cloud technology for their operations. The rise of AI is prompting more hospitals to move to the cloud, and when they make this shift, they are prepared for our Apex solution. We're noticing an acceleration in this trend. As mentioned in our prepared remarks, some of our AI-related launches are just starting to take off. We are also aligned with the broader technological trend of hospitals moving to the cloud, which increases demand for Apex. We are thrilled about this aspect of our business. The SaaS growth is very robust, and we expect it to remain strong. Additionally, we are converting our maintenance revenue stream to Apex at a very positive rate, which aligns with our strategy that we envisioned when we acquired the company several years ago.

I would just add that in the fourth quarter, we'll have lapped the license headwind from last year. So that does mean that the growth rate in Provation does accelerate to high single-digit in the fourth quarter, and would accelerate in 2025.

Got it. I appreciate it. Thank you.

Thanks, everybody, for taking the time. I know a very busy day for all of you in an obvious - as always, a busy earnings season. Hopefully, you heard from us today really a sense of some of the things we really were prepared for and in a lower growth environment, a number of really strong execution. I think we fall to the 60% incrementals, the strong operating profit growth that we had and EPS growth, really on the backs of lower growth. That will continue in the fourth quarter. And I really think that speaks to the power of FBS and the power of our ability to execute in this environment. We feel good about what the ramp - what '25 - what we can do in '25. We'll see how that plays out. But I think one of the things we've talked about for several years really played out this quarter is the pervasiveness of our innovation capability. You heard it at Fluke. You heard it at Tek. You heard it at ASP. You heard it within FAW. All of our major businesses, lots of examples of new innovative products that will - that are hitting the marketplace to give us what we think are really exciting opportunities and really speaks to the power of the changes we've made in our innovation process over the last several years. So we'll look forward to the continued follow-up from many of you, and we look forward to seeing you on the road here soon. Have a great rest of the season, and we'll talk soon. Thank you.