Fortive Corporation (FTV) Q3 2025 Earnings Call Transcript

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Overview

The earnings call highlights strong financial performance with positive EPS guidance, revenue growth, and strategic share repurchases. The Q&A session reinforces confidence with recurring revenue growth and regional demand trends. Despite some uncertainties in guidance details, the overall sentiment is positive, supported by strategic focus on M&A and shareholder returns.

Key Financial Performance

Core Growth Core growth of roughly 2%, driven by the Fortive Business System.

Adjusted EBITDA Growth Adjusted EBITDA growth of 10%, attributed to operating leverage, organizational streamlining, and cost discipline.

Adjusted EPS Growth Adjusted EPS growth of 15%, driven by adjusted EBITDA growth, favorable interest expense, and share repurchases.

Total Revenue Total revenue of just over $1 billion, up roughly 2% year-over-year, driven by growth in IOS and AHS segments.

Adjusted Gross Margin Adjusted gross margin down about 60 basis points due to tariff-related costs, partially offset by pricing actions and supply chain countermeasures.

Free Cash Flow Free cash flow of $266 million in Q3, with trailing 12-month free cash flow at $922 million, reflecting strong cash generation.

IOS Segment Revenue Revenue grew just over 2.5% on a reported basis with core revenue growth of 2%, driven by demand for Facility and Asset Lifecycle software and gas detection products.

IOS Adjusted EBITDA Margin Adjusted EBITDA margin grew to 34.6%, up from 33.3% in the prior year period, due to operating leverage and cost reductions.

AHS Segment Revenue Revenue of $328 million, up approximately 2% year-over-year, driven by improved demand for healthcare equipment and consumables.

AHS Adjusted EBITDA Margin Adjusted EBITDA margin expanded from roughly 27% to 28%, driven by operating leverage and flattened organizational structures.

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Operating Highlights

ServiceChannel's SaaS R2 release: Introduced AI-powered work order insights and streamlined payment solutions.

Fluke's GFL 1500 Solar Ground Fault Locator: Targeted high-growth solar operations vertical, enhancing customer productivity by reducing troubleshooting time and hazard exposures.

Innovation studio in Nashville and customer experience center in Irvine: Built to foster collaboration, accelerate innovation, and deepen customer relationships.

North America: Focused on high-growth verticals like solar operations, distributed energy, data centers, and defense. Early signs of impact observed.

South Asia, including India: Enhanced regional presence led to significant acceleration in both segments, leveraging exceptional economic growth in the region.

Recurring revenue growth: Fluke increased recurring revenue through maintenance software enhancements and expanded service plan offerings.

Adjusted EBITDA growth: Achieved 10% growth year-over-year, driven by operating leverage and cost discipline.

Share repurchases: Deployed $1 billion to repurchase 21 million shares, reducing share count by 6%.

Fortive Accelerated strategy: Focused on Innovation Acceleration, Commercial Acceleration, and Recurring Customer Value, supported by disciplined capital allocation.

Simplification post-Ralliant spin-off: Streamlined operations and organizational model, enhancing customer-centricity and operational efficiency.

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Risk or Challenges

Tariff-related costs: Tariff-related costs have impacted adjusted gross margins, creating a headwind to profitability. Despite countermeasures, these costs remain a source of uncertainty and volatility in global trade policy.

Macroeconomic conditions in Europe: Weakening macroeconomic conditions in Europe have led to a decline in revenue and worsened performance compared to previous quarters.

Healthcare reimbursement and funding policy changes: Changes in healthcare reimbursement and funding policies have caused U.S.-based hospitals to defer capital expenditures on healthcare equipment, impacting the Advanced Healthcare Solutions segment.

Government fiscal policy constraints: Tighter fiscal policy and constrained funding have pressured government demand for procurement and estimating solutions, affecting the Facility and Asset Lifecycle software business.

Ongoing volatility in global trade policy: Uncertainty in global trade policy continues to pose risks, particularly for professional instrumentation demand.

Execution risks in strategic growth initiatives: The company is in the early stages of executing its Fortive Accelerated strategy, which includes innovation acceleration, commercial acceleration, and increasing recurring revenues. These initiatives carry execution risks as they are critical to achieving long-term growth objectives.

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Guidance & Outlook

Full-year adjusted EPS guidance: Fortive has raised its full-year adjusted EPS guidance to a range of $2.63 to $2.67 per share, reflecting Q3 overperformance, incremental Q3 buybacks, and an unchanged view on Q4.

Core growth expectations for Q4: Overall core growth is expected to moderate in Q4, with Advanced Healthcare Solutions (AHS) core growth broadly in line with Q3 levels and very modest core growth at Intelligent Operating Solutions (IOS).

Market dynamics assumption: The guidance assumes a continuation of the market dynamics experienced at the end of Q3, including current or known future tariff rates, which are not expected to be material in Q4.

Capital allocation strategy: Fortive plans to focus on organic growth investments, accretive bolt-on M&A, share repurchases, and maintaining a modest growing dividend, all aimed at maximizing medium- to long-term shareholder value.

Regional growth focus: Fortive is intensifying its commercial focus on high-growth regions such as South Asia, including India, which is expected to drive strong momentum in the years ahead.

Recurring revenue growth: The company is focused on increasing recurring revenues, with Fluke making progress in enhancing maintenance software and expanding service plan offerings. Recurring revenue growth is expected to outpace consolidated growth.

Innovation and product launches: Fortive is accelerating new product introductions, including AI-powered solutions and tools for high-growth verticals like solar operations. This is expected to drive future growth.

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Shareholder Return Plan

Dividend Policy: Fortive maintains a modest growing dividend as part of its capital allocation priorities.

Share Repurchase Program: During the third quarter, Fortive deployed $1 billion to share repurchases, retiring approximately 21 million shares or 6% of its fully diluted share count. This reflects confidence in the company's ability to deliver on its value creation plan and the attractive valuations observed during the quarter.

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Key Q&A

Q:What was the reason behind the strong margin performance in Q3, and what is the outlook for Q4 margins?

A:The strong margin performance in Q3 was attributed to revenue outperformance and cost discipline, including discrete actions to free up resources for growth initiatives. For Q4, the company expects to redeploy some of the resources freed up in Q3, maintain cost discipline, and reinvest in growth initiatives. However, some one-time benefits from Q3, such as incentive compensation adjustments and increased capitalization of software development, will not repeat in Q4.

Q:How is the government shutdown affecting the company's performance, particularly in October?

A:The federal government shutdown has minimal impact on the company as its government business is mostly with state and local agencies. Direct exposure to the federal government is small, and the company feels confident in its guidance based on current conditions.

Q:What is the company's approach to capital allocation, including share buybacks and M&A?

A:The company deployed $1 billion towards share repurchases in Q3 due to strong free cash flow and attractive share valuation. Going forward, share repurchases will remain a key capital allocation strategy. For M&A, the company is focusing on smaller bolt-on acquisitions rather than transformational deals, aiming to accelerate growth in existing businesses. The financial framework does not rely on M&A for shareholder value creation.

Q:What is the outlook for the Fluke business, and what are the key drivers of its performance?

A:Fluke returned to growth in Q3, with strong order growth, stable POS, and improving channel inventory outside North America. Key drivers include product innovation, commercial execution, and growth in markets like data centers, defense, and India. The company is also driving more recurring revenues through maintenance software and service plans.

Q:What is the outlook for the Landauer business, and what are the key drivers of its performance?

A:Landauer continues to grow strongly due to its recurring revenue model and mission-critical radiation monitoring services. The company is focusing on innovation and add-on services to expand its customer base and enhance value.

Q:What are the demand trends in the AHS segment, particularly for equipment and consumables?

A:The software part of the AHS segment is performing strongly. Capital equipment demand is showing sequential improvement, especially in September, due to more certainty around legislative conditions. Consumables demand remains solid, with growth in major markets.

Q:What is the tax rate outlook for the company?

A:The adjusted P&L tax rate is expected to remain in the mid-teens through 2026, with some potential risk of increase due to pillar 2 proposals.

Q:What is the performance and outlook for the FAL business?

A:The FAL business continues to grow, driven by strong demand for its software solutions like ServiceChannel and Gordian. Customers view FAL software as a way to scale the impact of AI, and the company is seeing strong order growth and customer adoption of new products.

Q:What is the company's strategy for simplifying its business and driving growth?

A:The company is focusing on simplifying its operations to free up resources for growth initiatives. This includes strategic planning with its 10 brands to identify high-return growth opportunities, such as product enhancements, commercial capacity expansion, and add-on services. The company is also shifting its capital allocation strategy to balance share repurchases and bolt-on M&A.

Q:What are the regional demand trends for the company?

A:North America is the strongest-performing region, driven by favorable market conditions and targeted efforts in key markets like data centers. Western Europe remains the softest market, while China and other regions are stable but mixed.

Q:What is the margin trajectory and impact of one-time items in Q3?

A:Q3 margins benefited from one-time items like increased capitalization rates for software development and adjustments to incentive compensation. These items will not repeat in Q4, and OpEx is expected to increase as the company invests in growth initiatives. Segment-level margins are expected to remain flattish year-over-year in Q4.

Q:What is the company's approach to recurring revenue growth?

A:The company aims to increase its recurring revenue percentage, particularly in the Fluke business, by attaching more recurring offerings and shifting to Hardware-as-a-Service models. This is a key pillar of the Fortive Accelerated strategy.

Q:What is the outlook for organic growth and volume trends?

A:Organic growth is expected to moderate in Q4 due to tougher comps and timing-related impacts. The company is focusing on initiatives to drive volume growth, particularly in its largest brands like Fluke and AHS.

Q:What is the company's confidence in the AHS segment despite healthcare policy challenges?

A:The company is confident in the AHS segment due to strong customer loyalty, innovation, and recurring value offerings. Long-term healthcare trends, such as aging demographics and provider shortages, support the segment's growth potential.

Q:What is the company's guidance for 2026 and beyond?

A:The company expects 3%-4% organic growth, 50-100 basis points of adjusted EBITDA margin expansion, and high single-digit plus adjusted EPS growth through 2026. This guidance reflects the impact of the Fortive Accelerated strategy.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the organic growth composition for the FAL business in Q3, only stating that it was helpful to the fleet average. Additionally, there was a lack of clarity on the exact breakdown of the $63.6 million in other adjusted operating profit, which was later attributed to separation-related stock compensation matters.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call reveals several concerns: flat or declining revenues in key segments, tariff impacts, deferred spending, and lack of detailed guidance. While management projects some positive future trends, uncertainties around tariffs, government spending, and healthcare policies persist. The Q&A section highlights analysts' concerns over deferred projects and lack of clarity in management's responses. Despite some positive aspects, such as share repurchases and potential EPS growth in Q4, the overall sentiment is negative due to current financial weaknesses and uncertainties.

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