Fortive Corp Q2 FY2025 earnings call

• Fortive successfully completed the spin-off of Ralliant on June 28, 2025, emerging as a simpler and more focused company. - In the final quarter as a consolidated company, adjusted EPS was $0.90 at the high end of guidance range with 8% growth in trailing 12 months adjusted free cash flow. - For new Fortive continuing operations, adjusted EPS was $0.58 with 14% growth in trailing 12 months free cash flow despite customer demand pressures in late June. - Highlights of executing Fortive Accelerated strategy: Fluke's 1670 Series Multifunction Installation Tester won awards, Gordian saw strong adoption of new cloud-based module, Latin America growth strategy ramped, Fluke had double-digit ARR growth in recurring revenue, and participated in President's Kaizen Week with AI deployment. - Disciplined capital allocation includes activating bolt-on M&A engine with rigorous evaluation based on relative returns.

In the final quarter of consolidated results including the Precision Technologies segment (now Ralliant), Fortive delivered Q2 adjusted EPS of $0.90 at the high end of the guidance range and generated approximately $300 million in adjusted free cash flow. On a trailing 12-month basis, free cash flow grew 8% and free cash flow conversion and adjusted net income was 105%. For continuing operations, total revenue was just over $1 billion, down 0.4% year-over-year. Core revenue declined 0.7%. Intelligent Operating Solutions: Revenue and core revenue growth were essentially flat year-over-year. Adjusted gross profit came in at $461 million, down slightly from prior year. Adjusted gross margins declined to 66.1% from just under 70% a year ago. Adjusted EBITDA grew 2% to $236 million. Advanced Healthcare Solutions: Total revenue was $320 million, below expectations, down 1.3% year-over-year and 1.9% on a core basis. Adjusted gross profit was up slightly. Adjusted gross margins were up from just under 58% last year to just over 59%. Adjusted EBITDA was flat year-over-year at $86 million.

• Initiated full year adjusted EPS guidance for new Fortive at $2.50 to $2.60 per share, assuming continuation of Q2 market dynamics. - Q3 reported revenue expected to be broadly similar to Q2 including modest FX tailwind. - Second half core revenue growth expected to be in range of first half. - AHS core growth in second half expected similar to Q2 with challenging Q3 comp. - Q3 adjusted EBITDA expected lower than Q2 on dollar basis due to seasonality and tariff impact. - Tariff countermeasures expected to fully mitigate gross tariffs by fourth quarter, with Q3 seeing modest gross margin and EPS headwind from countermeasures phasing in. - Annual adjusted EPS guidance assumes net impact of tariffs based on currently announced rates. - Interest expense lower due to lower debt balances from dividend proceeds used to pay down debt, and plan to use remaining dividend proceeds for share repurchases.

• Tariff-related cost pressures and uncertainty impacting revenue, as seen in Q2 with end-of-quarter demand pressure and near-term revenue impacts and challenges with revenue visibility. - Global trade and fiscal policy volatility remaining as seen recently, which could continue to impact results. - Uncertainty around the timing of government spending projects flowing through revenues for certain segments like Gordian.

Q: Julian Mitchell of Barclays asked about second half moving pieces, EPS framework, and end markets leading to Q2 shortfall.

A: Mark Okerstrom explained seasonality, tariff impact, and tax rate factors. Olumide Soroye discussed government spending projects and health care equipment deferrals.

Q: Nigel Coe of Wolfe Research asked about second half sales, AHS comps, Gordian recovery, and software renewal rates.

A: Mark Okerstrom and Olumide Soroye talked about sales trends, AHS comp challenges, Gordian recovery progress, and strong software renewal rates.

Q: Stephen Tusa of JPMorgan asked about organic growth guidance, bolt-on M&A approach.

A: Mark Okerstrom explained simplification of communication and focus on value creation plan. Olumide Soroye discussed bolt-on M&A criteria and proprietary deal cultivation.

Q: Jeff Sprague of Vertical Research Partners asked about IOS, AHS margins, and annual tax rate.

A: Mark Okerstrom talked about IOS and AHS trends, and annual tax rate in 14% to 16% zone.

Q: Scott Davis of Melius Research asked about spin distraction on organization.

A: Olumide Soroye mentioned team's effort and Fortive Business System's role in resiliency.

Q: Andy Kaplowitz of Citigroup asked about Fluke, China, Europe, and regional markets.

A: Olumide Soroye discussed Fluke's strength, North America's strong trajectory, and China and Europe market outlooks.

Q: Joe Giordano of TD Cowen asked about hospitals and bolt-on M&A appetite.

A: Olumide Soroye talked about hospitals' device preferences and bolt-on M&A criteria.

Q: Deane Dray of RBC Capital Markets asked about stranded costs and June business performance.

A: Mark Okerstrom mentioned stranded cost progress and Olumide Soroye discussed June business areas like Fluke short-cycle products, health care capital equipment, and government procurement deferrals.