Fortive Corp Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Strong execution led to record third quarter adjusted gross and operating margins, 14% adjusted EPS and 12% free cash flow growth on 3% revenue growth.
• Software businesses had high single-digit ARR growth, hardware orders returned to growth.
• Leveraged Fortive Business System (FBS) to mature supply chain and increase production capacity.
• Fluke launched five major new products in September, Tektronix to launch new oscilloscope probing technology, EA to release industry-first triple channel bidirectional power supply.
• Accelerated share repurchases, bought back ~4 million shares in Q3, year-to-date ~6 million.

Segment Performance

• Intelligent Operating Solutions (IOS): Revenues grew 4% with adjusted operating margins up 130 basis points to over 30%. Had 3% revenue growth (approximately 2% core), adjusted operating margins expanded 50 basis points. Fluke had high single-digit orders growth, segment ARR growth was high single digit. Full year expected mid- to single-digit core growth with ~100 basis points of adjusted operating margin expansion.
• Advanced Healthcare Solutions (AHS): Revenues grew 8% (9% core) with adjusted operating margins up over 300 basis points. Double-digit consumables growth, strong capital and equipment sales, ~20% SaaS growth from Provation. Full year expected mid- to high single-digit growth and over 200 basis points margin expansion.
• Precision Technologies (PT): Revenue flat in the quarter with core decline of almost 4%. Acquisitions net of divestitures contributed over 3 points to growth. Adjusted operating margins up 70 basis points year-over-year to 26.4%. Tektronix core revenues down high single digit but orders up high single digit. Qualitrol and PacSci EMC had double-digit growth. Full year expected PT revenue down low single digit on core basis with adjusted operating margins approximately flat.

Guidance

• Fourth quarter: Revenue growth ~3% (1% core), adjusted operating profit expected to increase 6%, adjusted diluted EPS range $1.11-$1.14, free cash flow ~$425 million.
• Full year: Growth ~3% (1% core), adjusted operating profit margins up ~100 basis points, adjusted diluted EPS range raised to $3.84-$3.87, free cash flow ~$1.4 billion.
• 2025: Encouraged by stabilizing trends, continued momentum in recurring revenue businesses, gradual recovery in Precision Technologies expected, ~75% of free cash flow to be deployed to share repurchases.

Risks

• Geopolitical and macro uncertainties affecting Precision Technologies recovery.
• Potential tax rate increases globally affecting effective tax rate.
• Customer delays in spending, especially in government and certain industrial markets.

Q: Nigel Coe of Wolfe Research asked about segment growth in Q4.

A: Elena Rosman and Charles McLaughlin responded, stating mid to high-single-digit for AHS, low single-digit for PT, and low single-digits for IOS.

Q: Julian Mitchell of Barclays asked about IOS segment dynamics and tax rate.

A: James Lico and Charles McLaughlin responded, noting organic growth in all segments next year, margin expansion expected, and tax rate likely to increase from 11% to 13%-15%.

Q: Scott Davis of Melius Research asked about Tektronix orders and customer delay spending.

A: James Lico responded, discussing Tektronix orders inflecting positive and customer delay spending related to election uncertainty and inventory reluctance.

Q: Jeffrey Sprague of Vertical Research Partners asked about share repurchase and spin progress.

A: Charles McLaughlin and James Lico responded, discussing share repurchase plans and spin progress on track.

Q: Joseph Giordano of TD Cowen asked about EA market recovery and Fluke orders.

A: James Lico responded, discussing EA market recovery expectations and Fluke orders showing durability.

Q: Andy Kaplowitz of Citigroup asked about Fortive by geography and AHS runway.

A: James Lico responded, discussing regional trends and AHS mid-single-digit growth runway with margin expansion.