Fortive Corp (FTV) 2017 Q3 法說會逐字稿

My name is Kristen, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Third Quarter 2017 Earnings Results Conference Call. (Operator Instructions) I would now like to turn the call over to Ms. Lisa Curran, Vice President of Investor Relations. Miss Curran, you may begin your conference.

Thank you, Kristen. Good afternoon, everyone, and thank you for joining us on the call. With me 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 SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Financial Information. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Friday, November 10. Instructions for accessing this replay are included in our third quarter 2017 earnings press release.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases in financial metrics are year-over-year. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we believe or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2016. 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, Lisa, and good afternoon, everyone. We are pleased with our third quarter results as our teams continued to execute well and deliver substantial core revenue growth with very strong adjusted earnings per share growth and free cash flow generation. The financial performance this quarter demonstrates the strength of our market position, industry-leading innovation and the diversity of our portfolio amidst improving global end markets. We also took meaningful steps to strategically position Fortive for enhanced long-term growth through M&A.

As we will discuss, in addition to the strong financial performance in the quarter, we were excited to close on $1.6 billion of acquisitions, including Orpak, ISC and Landauer that will contribute key product technologies and strengthen our recurring revenue profile. We believe these strategic portfolio additions and the power of the Fortive Business System will accelerate our growth trajectory and continue to deliver superior returns.

Before getting into the earnings results, I'll briefly update you on this year's CEO Kaizen event, which we held earlier this month. As we did in 2016, we brought together our top leaders across the company and spent the week utilizing FBS tools to focus on our key growth initiatives. The CEO Kaizen provides an opportunity to celebrate our core values and to recognize our culture of continuous improvement. This year, more than 20 Kaizen teams advanced actions across our platform that will deliver accelerated innovation and market share in 2018 and beyond.

With that as a backdrop, let's turn to the details of the third quarter. Our adjusted net earnings of $271.5 million were up 16% over the prior year, representing the third consecutive quarter of double-digit earnings growth. Adjusted diluted net earnings per share were $0.77 with an effective tax rate of 24.4% for the quarter. Sales grew 7.5% to $1.7 billion, including a core revenue increase of 4.8%. Revenue growth was broad-based as all 6 strategic platforms grew core sales and 4 of 6 grew core sales mid-single digits or better. This performance reflected the success of multiple product introductions, favorable price, continued performance in high-growth markets and improving industrial end markets in North America.

The favorable impact from acquisitions substantially accelerated to 180 basis points of growth, given the success of our capital deployment and strong business performance in strategic markets.

Geographically, high-growth markets grew -- core revenue grew double digits with continued strength across Asia and improved growth in Latin America. Mid-teens growth in China was led by business wins at Jacobs Vehicle Systems, Tektronix, Fluke and Kollmorgen. Developed markets core revenue grew low single digits driven by continued strength in Western Europe and improved better performance in North America at Tektronix and in our automation businesses.

We posted a record gross margin of 49.8%, an increase of 50 basis points over last year. Operating profit margin was 21.1% in the quarter, with favorable incrementals driving core operating margin expansion of 150 basis points or 90 basis points, excluding the benefit from lower amortization. The widespread application of FBS delivered core operating margin expansion in 5 of our 6 platforms.

During the third quarter, we generated $287 million of free cash flow and delivered a strong conversion ratio of 107%.

Turning to our segments. Professional Instrumentation posted sales growth of 8.7% with core revenue growth of 5.3%. Acquisitions contributed 270 basis points and favorable currency, 70 basis points. Core operating margin expanded 240 basis points, with reported operating margin up 22.7%.

Advanced Instrumentation & Solutions core revenue increased mid-single digits during the quarter, led by high-single-digit growth in high-growth markets. Field solutions core revenue was up mid-single-digits in the quarter with both Fluke and Qualitrol posting strong core revenue growth. As I mentioned previously, we're very excited that we have closed the acquisition of Industrial Scientific and Landauer, which together create a meaningful safety-as-a-service footprint that accelerates our connected device strategy. ISC, a leading provider of portable gas detection equipment and services, is off to a great start and was very quick to adopt our FBS culture. Landauer, which just closed last week, is expected to bring strong recurring sales growth given the strength of its technology and subscription-based radiation exposure services focused in the medical end market.

Fluke's mid-single-digit growth included solid growth across all regions, particularly high-growth markets. This is the fifth consecutive quarter of improving core growth despite more challenging comparisons. Performance was led by Fluke Networks and Fluke digital systems, which includes the key components of the Accelix reliability platform. The Accelix pilots we announced last quarter are advancing with several large customers. As an example, utilizing the Fluke Accelix platform, a Fortune 100 health care company will deploy our condition monitoring solution, which includes power quality, ultrasound vibration and thermal imaging tools. This customer's facilities are now capable of providing real-time critical alerts to maintenance technicians, allowing full access to their enterprise asset management data via mobile technology. While implementation is still in the initial phase, all the pilots are demonstrating that our comprehensive solution delivers real measurable value through asset reliability and increased uptime. In addition to these large-scale condition monitoring pilots and the growth of the funnel, we also saw strong double-digit revenue growth at eMaint during the quarter.

Fluke maintained its leading market position through innovation, and in the third quarter, Fluke launched a noncontact voltage products we previewed at Investor Day. This T6 family of electrical testers with field solutions technology makes work safer by enabling technicians to measure voltage without making metal-to-metal contact. Fluke has already received 2 innovation awards for this product from distinguished industry associations and sales are well ahead of plan.

Qualitrol delivered high single digit growth led by further penetration of condition-based monitoring solutions for Europe and Chinese OEMs as well as Middle East utilities. The China market continues to benefit from ongoing investment in high voltage transmission, while offset by the Middle East, where political instability is delaying budget approvals.

Moving to product realization. Platform core revenues were up mid single digits for the quarter led by growth at Tektronix. Tektronix high single digit core revenue growth continues to be driven by high-growth markets with double-digit growth in Asia. This performance reflects strong sales growth in the semiconductor and mil/gov end markets and high demand for Tektronix's groundbreaking new product introductions.

Sales performance of the Tektronix 5 Series mixed-signal oscilloscope has exceeded our expectations. Using FBS tools, we executed against our go-to-market action plan to accelerate end user demand. As we previously noted, this new platform will have a more meaningful impact starting in 2018, but we are very encouraged by the strong start.

Our sensing technologies platform delivered high single-digit core revenue growth in the quarter led by double-digit growth in high-growth markets. While market share gains in global industrial stabilization impacted worldwide growth, a key business win in the semiconductor upcycle led growth in North America. One of our new technologies is the Setra Flex environmental monitor, which just recently won the 2018 air-conditioning, heating and refrigeration innovation award in the building automation category. Setra Flex is used to ensure safe and energy efficient indoor environmental and ventilation control conditions in all types of pressurized critical spaces, including operating rooms, biosafety labs and clean rooms.

Moving to our Industrial Technologies segment. Revenue grew 6.5% with core revenue growth of 4.4% and sales from acquisitions contributing 100 basis points. Core operating margin expanded 50 basis points with reported operating margin of 21.8%.

Our Transportation Technologies platform posted low single-digit core revenue growth in the quarter, reflecting solid sales growth across the platform. Low single-digit core revenue growth at Gilbarco Veeder-Root came in as expected as demand for EMV in North America slowed versus very strong prior-year double-digit comparisons. Global dispenser sales were up mid-single digits, reflecting continued outperformance in Europe and EMV-related sales growth in the U.S. High-growth markets core revenue grew double digits, driven by strong demand for dispensers, submersible pumps and automatic tank hinges. Integral to our high-growth market strategy, we closed the previously announced acquisition of Orpak during the third quarter.

In August, Orpak was named the winner in a large fuel automation tender issued by IOCL, which is the largest oil company in India. Orpak will deploy its ForeSite fuel station management automation technology in up to 10,000 stations. We are very pleased with Orpak's performance and happy to have the team as part of the Fortive family.

Separately, our thoughts are many of those that are affected by the devastating September hurricanes across the U.S. As gasoline demand spiked and supply was disrupted, our Insite360 fuel logistics team was able to prevent or significantly reduce our customers' fuel runout rate across the affected areas.

Telematics posted core revenue growth of mid single digits in the quarter led by strong SaaS sales growth and increased installed base growth. The success of our new Director platform and the strong adoption of electronic logging devices, especially in the small to medium business segment, has helped performance in the U.S. as core sales in North America improved sequentially by greater than 400 basis points. Given this positive trend, we continue to see North American performance accelerate and expect Telematics to exit the year at high double-digit growth rate.

Automation and specialty grew core sales high single digits driven by continued double-digit growth in high-growth markets and robotics. Jacobs Vehicle Systems delivered high single-digit core revenue growth. Kollmorgen once again posted double-digit core revenue growth, reflecting strong demand across its global industrial automation product line, which is driven by general industrial stabilization and continued robotic strength in Europe, China and Japan. Kollmorgen released the newest servomotor product, AKM2G, at Pack Expo in Las Vegas and also launched its latest mobile robotics system software, NDC8 3.0.

Thomson delivered mid-single-digit core revenue growth driven by double-digit growth in high-growth markets and strong North American distributor growth. Thomson released the newest addition to their Smart Actuator family that incorporates a synchronization feature for applications where multiple actuators are used in tandem to move the same load. Innovation across the automation businesses is driving new project wins to help position the business for future growth.

Franchise distribution core sales were slightly up versus last year. Matco core sales were flat as growth in diagnostics was offset by continued softness in tool storage and a challenging hardline tool sales comparison.

To wrap up, we are very pleased with the execution in the third quarter. We have made continued progress towards increasing growth and greater recurring revenue to enhance our portfolio. We're building a great industrial growth company and we're doing that with the Fortive Business System. The strength of our cash flow generation and balance sheet positions us well for continued capital deployment towards acquisitions as we leverage in the Fortive formula to continue to deliver strong earnings growth.

We are raising our full year 2017 adjusted diluted net EPS guidance range to $2.82 to $2.86, which includes our core revenue growth expectation of mid-single-digits and an effective tax rate of 25%. We continue to anticipate core margin expansion of more than 50 basis points for the year and free cash flow conversion of approximately 105%. We are also initiating our fourth quarter adjusted diluted net EPS guidance of $0.74 to $0.78, which includes assumptions of low single-digit core revenue growth and an effective tax rate of 24%.

With that, I'd like to turn it over to Lisa.

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

(Operator Instructions) Our first question comes from the line of Scott Davis with (inaudible) Research.

I think I missed -- some of this I was out when you did Industrial, Scientific and Landauer, I guess it is. How do they -- are there synergies with the Fluke business and Qualitrol? Or are there -- they're both kind of software-as-service-businesses. I mean, and they're -- and detection. Are there ways to bring these things together and get kind of extra synergies, if you will?

Yes, exactly right. And maybe a little bit. ISC, first and foremost, will be a separate operating company for us but will clearly have some synergy with the Fluke team. Wes and the team have really seen some opportunities to really combine sort of what we view -- what we deem the term "safetenance " which is to really take the maintenance professional, it's really a core part of the Fluke business and make sure that they have all the safety equipment that's just core to the technologies at iNet and at ISC. So there's certainly a nice synergy there that the team's working on. And with Landauer, they're real positioned in hospital with radiation services. Really goes well with a number of product technologies that we have in the Fluke biomed business, probably more directly synergistic with that business. So certainly, some synergies there. So great businesses independently, but we'll also make sure we take advantage of a number of the synergies. We're off to a great start at ISC, as I said in the prepared remarks. Just closed Landauer, but we're really excited to have them on the team as well.

And are these fragmented businesses where you've got opportunity over a number of years to roll them up? How does the structure of that industry stand right now?

Probably a little bit different. We like the -- this portion of the -- as you know, several of our peer companies have rolled up several safety companies. But we really see ISC as very different gas detection play, really focused more on their recurring revenue model and how they really go-to-market really is directed at specific kind of customer that really marries well with the Fluke customers. So probably less of a roll up strategy directly within product technology. But some opportunities to sort of build on the software and data analytics capability that we have within the portfolio today or might add to the portfolio down the road. And same will be true with Landauer as well.

Our next question comes from Julian Mitchell with Crédit Suisse.

Just a question firstly around transportation tech. So it looks as if that business may be -- or GVR specifically may be down slightly in the fourth quarter. So maybe just discuss, I guess, if that's the case and how long you think that type of softness persists thereafter? And maybe give a little bit more color as well on dispensers, specifically, because I think one of your competitors have talked about a pickup recently in orders there. But the 10-Q commentary suggests not in your case.

So yes, first, maybe more broadly around where we're at with Gilbarco Veeder-Root. We had a good quarter. They did decel off double-digit growth. And as you know, Julian, we've had double-digit growth in that particular part of the market for a number of years here. So a little bit of slowing in North America, but -- and we think that probably accelerates a little bit into the fourth and into the first quarter. So break down, low single digits in the fourth and maybe slightly worse than that. But that probably persists into the first quarter, and then will sequentially get better through the year. We still think Gilbarco can grow in 2018. So still an opportunity for margin expansion in the business with that sort of growth profile. And they've already done an exceptional job thus far. So we have a great quarter (inaudible) one of our best quarters I think that we've ever had. So (inaudible) quarter for us and as we see globally. I think -- I never take stock in what's happening in the first couple of weeks or anything like that. So I think we'll see a little bit of slowing here for a little bit. But as we look at the market, we have a -- this is one of those things where because we have such connections with the top 300 customers, we have a pretty good sense of what they're going to be doing here. So as we look at things, we certainly see a little bit of an air pocket here for the next couple quarters. But we're still pretty confident on the rollout as we look out over the next 2 or 3 years.

Great. And then just my follow-up would be that gross margins had a nice expansion in Q3 having been flat in Q2. Is that really all about pricing? That seemed to get stronger in both businesses in the third quarter.

Julian, this is Chuck. Yes, we were happy to see our third quarter gross margins expand as we expected across the business. We saw that really across the portfolio, a strong performance. Our prices, as we've mentioned as a piece of that was 50 basis points. But when you mentioned back in Q2, when we didn't see as much, that was coming off of a really tough compare. And when you look year-to-date, we still felt confident about getting the kind of gross margin expansion that we saw and expected in Q3 and expect to continue into Q4.

Our next question comes from Andrew Obin with Bank of America Merrill Lynch.

Just some questions on product realization. Looking at the Q, it seems that it slowed down sequentially, but then your commentary on Tektronix was quite positive. It's been a nice boost to growth this year. Can you just give us color what happened in the quarter and how the growth rate will look into the year-end?

Yes, sure. Product realization really makes up really 2 big businesses, Tek and EMC. Tek, as you mentioned, had a very strong quarter on the back of both good market work, but also the product introductions and innovation that they've launched in the quarter. So we think they'll continue to see strength. As I mentioned in the prepared remarks, North America picked up a little bit for Tek as well, which was good to see on the back of some of this innovation. EMC had a little bit of a tougher -- they had a very tough compare. We had talked about a bunch of backlog last year had moved from the second quarter into the third quarter given them an exceptionally strong third quarter last year. So they were banking against the big comp. But their book-to-bill is very strong and we feel very good about their growth for the year. So I think when you take that stock of that, I think product realization will have a good fourth quarter.

And just a follow-up on Landauer. Now that you own the business, what are the most obvious sort of targets for cost synergies or just sort of cost takeout? How does that look now that you own it versus when you bought it?

Well, we've owned it for a very short period of time. But nonetheless, I think we certainly feel that the public company costs will come out. That certainly is, I would say, probably easy to do. We certainly think there's FBS opportunities. Even in the early days, the management there has been excited about those opportunities. Obviously, the -- Wes Pringle and the leadership of field solutions are very good at FBS, and so their ability to apply that will give us some opportunities. There's some global go-to-market synergies as well and we'll be able to leverage the sales force that we have there in the Fluke business, particularly in the -- what we call the biomed business. So both cost synergies directly, some FBS opportunities plus some synergies, maybe not necessarily cost takeout, but to really leverage scale that we've already invested in at Fluke.

Our next question comes from Nigel Coe with Morgan Stanley.

So just wanted to dig in, just wanted to make sure, I heard that low-single-digit growth in 4Q, I think that's what you said, Jim. So just wondering, trying to kind of (inaudible) the impact of Transportation Technologies within that? And then maybe just any color you can give us in terms of how that breaks out within PI and industrial.

Yes, I think PI will be good in the fourth quarter. A lot of the things we talked about in the prepared remarks at places like Fluke and Tek, which are some big parts, we'll continue to see. Sensing we'll continue to do pretty well. So I think, yes, we feel good about where PI is. As we mentioned in the remarks, we are seeing a little bit of an industrial -- particularly North America, a little bit of pickup in the industrial markets. Certainly saw that with peer companies as well as some of our customers like Grainger and WESCO. So I think we feel good about the trajectory of the business, not just from a market perspective, but also from a lot of the innovation we have. So PI should be -- should have a good quarter. Really, the move down in, we're also banking against a little bit tougher comp in the fourth. Unlike a lot of folks, we had a good fourth quarter growth rate that we're comping against. So when you look across the portfolio, with the exception of Matco probably still slow, Gilbarco was down a little bit, but other than that, the rest of the portfolio should be in pretty good shape.

Okay, that's helpful. And yes, comps definitely gets up at the end of 4Q. You were definitely a little bit earlier to (inaudible) recovery. And maybe a question for Chuck. On the free cash flow, the guidance is 105% for the full year, but I think you're in the maybe high 80s year-to-date. Maybe just give us some color in terms of what's being taxing free cash flow year-to-date for the conversion and what changes in 4Q?

Sure, Nigel. First of all, 88% year-to-date is about where we would normally expect to be. And because the first half of the year, especially the first quarter, we have a little bit lower revenue and then we pay out -- there's some onetime payments, ICP and whatnot goes out in Q1. And then we finish much stronger, more like 130-plus percent in Q4. That's just normal. So we really think we're at a good spot here and tracking right to 105%.

Our next question comes from Richard Eastman with Robert W. Baird.

Chuck, maybe I'll just quickly address this to Chuck. Just from the standpoint of when you look at Landauer and maybe also with ISC, those 2 business models have a pretty high recurring revenue kind of subscription oriented model. How -- can you give us some help as to how they come into Fortive's P&L either accretion, or just is a big chunk of the revenue of either of those businesses have to be deferred?

No. I think that next year, when we get into next year after that normal step up of just in terms of the acquisition after the first few months. No, it'll come in pretty much as you've seen them in standalone in 2018. So we're going to see that revenue. And as you mentioned, Landauer has got over 80% recurring revenue, that may be pushing 90%. And ISC is an evolving -- they're in the 40s but increasing that percentage. So both of those things are going to be trends that help us going forward.

Okay. And just from the standpoint of adjusted EPS, again, maybe math suggests that certainly with Landauer, that with first year synergies that maybe, can both of ISC and Landauer each contribute something high single-digit pennies per share? Call it $0.08 or $0.09 per share each?

Each? No, I think in -- when we look at the 3-year ROIC, we like the returns on both of those deals. But that sound a little bit rich in the first year, but both are going to be accretive and be a driver for us next year in 2018. We're going to give more color when we give our Q4 results in terms of what the guide is next year. But both of those I expect to be accretive next year.

Okay, I understand. And then just, Jim, in the industrial tech segment, when you look at the automation specialty business, some of that, Kollmorgen, Thomson, much of that goes through distribution. And with the pressure on these industrial distributors, certainly in North America, given kind of the Amazon effect, are you seeing anything, any push down on pricing to Kollmorgen, to Thomson from that channel?

We are not. No, we aren't, Rick, and I think there's a couple reasons for that. We're a little bit more in the specialty channels here is when you think about Kollmorgen's motor businesses as an example, it's really not, maybe it's more custom applications with OEMs. Even if we bring that through distributors, it tends to be more -- we've got more content from a customization perspective. And so we tend to not see -- we don't really play in the commodity market. And I call it commodity, but really in the sort of general space. So I think it would not be unusual for us to not see that sort of price compression if it existed with those channel partners. So as we mentioned, 50 bps of price in the quarter and it was pretty good across the portfolio. So from that standpoint, we continue to believe that we can get a little bit of price. We mentioned a couple of innovations in the prepared remarks, both at Kollmorgen and Thomson, which are the 2 biggest piece of automation. And that really helps obviously give us better gross margins in the portfolio, because a big part of FBS is making sure that our innovations have better gross margins than the products that they replace.

Our next question comes from Jeff Sprague with Vertical Research.

Just a couple quick ones. Jim, could can you just elaborate a little bit more on how to think about kind of the rollout of new products at Tektronix? You alluded to a stronger performance next year. Are you talking kind of simply the annualization of what's happening in the back half of this year? Or is there another wave of SKU count coming, et cetera? Maybe what type of growth contribution you're looking for there.

Yes. So we launched of the 5 Series at the tail end of the second quarter. That's really probably the largest contributor to what we saw in the third. That's our new midrange oscilloscope. As we mentioned, that's a start, that's a platform product that we'll have a number of other new generation products. So there'll be another version of that coming out roughly next year around the same time. We've got a couple of other products that are a little bit lower volume that contribute to it as well in a couple different maybe high rank categories, what we call the bit error rate tester or BERTScope as well as our arbitrary waveform generator. So 2 other products that are more higher end defense, mil/gov, advanced research oriented, data center oriented. So a number of those will also be launched. So when we think about where tech is, it's probably still a little early to see whether they're going to pan out for the year next year. But we continue to see strength there. We talked about China. We're starting to see some of the developed markets get a little bit better on the back of some of this innovation. So certainly, the annualization will be an impact next year, particularly in the first half. But we've got another wave of product that should keep it in -- growing throughout every quarter next year.

Great. And then, I guess, speaking of waves, a little M&A wave starting here. What's the pipeline look like? Should we expect anything else before year-end perhaps? Or maybe give us a little color on the funnel.

Well, yes. It's always hard to say, and I -- we feel really good about what we did in the third quarter, and quite frankly, what we've done since the start. When you think about the traction we're getting in deals like eMaint and GTT that we did around this time last year as well as the bigger deals that we transformed -- or transacted, excuse me, in the third quarter. There's still -- the funnel still is really good. We're as busy as we've ever been, so we continue to be busy with opportunities. And we feel good about where we're at. You never know if we'll get something done or not. We're always working on things, but you never know. So we feel good about where we're at and where we'll be. I think the other thing maybe just -- maybe expecting another question is certainly, things are -- there are things that are expensive. You certainly see that certainly as the market goes up. But I think what we've been able to find is opportunities for good returns. You certainly see that with the portfolio of things we've done. So while pricing obviously has moved up a little bit as the market's gone up, particularly on public stuff, we clearly have seen opportunities to still have those kinds of returns that are important to the company.

Our next question comes from Steve Tusa with JPMorgan.

Just a quick housekeeping item. Is the 24% tax rate, 24% tax rate, is that kind of the sustainable rate going forward now? Or is that -- or is there something kind of unique about this year?

Steve, great question. No, I think that 25%, what we've averaged for the year, is probably -- is what I'd guide you to next year. The one thing that's happening this year is the accounting change with the option, the benefit from ex option exercises. I think that we believe that's uniquely impacting this year. We've also done a great job, the tax team has done a great job getting the tax rate down into the 25s a little ahead of schedule. But I think 24% is probably -- we'll get there someday, but not next year.

Okay. So 25% next year?

Yes.

Okay. And just on the acquisition pipeline, can you maybe provide a little bit of color on if there are any big fish swimming around out there? Or pretty steady state? What's your appetite for deals here over the next, call it, I don't know, 9 to 12 months?

Well, I think we really are -- and I know we maybe sound like a broken record, I apologize for that a little bit. But we really do have a good balance still. Certainly, a couple of bigger things came out with Landauer and ISC, but we've got a number of -- the funnel it's pretty balanced around large things. Certainly, some things that would be great bolt-ons to some of the businesses as well, so a good balance of those things. We certainly have the capacity to do a number of things, so it's not -- we're not in any way inhibited by what we've just done. I think the free cash flow generation, the strong profitability, we're going to have double-digit earnings. We've obviously had it for 3 quarters in a row. We expect it for the next several quarters and certainly all of next year. So I think that certainly gives us the ability to do a number of things. I think one of the best things about where we're at right now is a number of degrees of freedom that we have.

Okay, great. And sorry, one last one. I jumped on a little late. I'm not sure if anybody asked about semiconductor, the kind of sustainability of what's going on in China semis. If somebody's already asked about it, then don't even worry about it, I'll read the transcript. But just wanted to get your take on how sustainable that is and what kind of visibility you have in the next year.

Yes. So the no one asked it. So I think we'll have a good year in semi. Particularly, probably the biggest aspect of that is in China where we've been benefiting from that with Tektronix. We saw a number of other parts in semiconductor improve in some of our smaller businesses like sensors, et cetera, and other places, which doesn't necessarily move the needle necessarily for the overall company, but certainly gives us a sense that things are actually getting even a little bit better, so -- and the little bit more broadly. So we feel good about what that market will look like into '18.

Our next question comes from Deane Dray with RBC Capital Markets.

Just go back to price for a moment. You said 50 basis points in the quarter. If you kind of go across the portfolio, where are you getting the most price? And where are you finding it toughest where you actually have negative price in areas in the portfolio?

Deane, actually, it's very balanced across most of our companies. There's a few point places where I think maybe a little bit where we didn't get as much at tech. They brought us some new products so they're actually seeing good margin lift. And they really have got a mix thing going, I believe, with China and the rest of the world. But we don't see it there as much. And also, I think that in probably -- telematics is down a little bit as well. But that's the competitive market and that's not as unusual. Although we've seen some good price realizations coming up as we go forward as the ELD is being rolled out. So even there, we're seeing improvement, but it's really strong across the portfolio.

Yes, maybe just to add on, Deane. A lot of folks have talked about price cost and we've been in really good shape relative to cost. So the price aspect of this is -- the incremental have been really good. So as Chuck mentioned, it's good to see across the portfolio. And with the fact that our procurement supply chain teams are doing such good on the cost side, it -- that's why you see the continued confidence in our gross margin improvement.

Sure. And then just as a follow-up, since it is such an important bellwether, the Fluke business, how did it look on the sell in versus sell through across our distributors?

Yes, we get the best data in North America and in Europe, even though we get it around the world. But North America looked pretty good. Sell in, sell out was relatively close. We didn't see any inventory build whatsoever, so I think if we look -- and if I look more broadly in North America around places where we get channel sell out, on balance, all pretty good numbers. So I think sustainable for at least in the -- these are all short-cycle businesses. But at least within the year, we think things stay pretty good, and I think that's what we've heard. So I think on balance, Europe is -- Western Europe is kind of the same way. Pretty good. So we do get pretty good inventory levels from the distributors in Europe as well and we haven't seen any inventory building -- buildup as well. So sell in, sell out is looking pretty good right now.

Our next question comes from Andrew Kaplowitz with Citi.

So Qualitrol had high-single-digit growth again based on further penetration of conditions based monitoring, you talked about that in Europe and China. Can you talk about what the business is doing there to achieve that kind of growth? Because when I look at competitors, I don't know if they're growing at that pace. And they seem to be suggesting that it's a little more choppy than you guys are seeing. So it seems like you either are taking share or maybe you're even in different parts of the market than they are.

Yes, a couple things. One, we're pretty local in China, so -- as an example. So we really have a good business not only with -- also with the Chinese OEMs. So we really have a broader, probably a broader business than a lot of others than maybe sometimes we hear about. We have a little bit of maybe advantage of law of small numbers, too. But I think on balance, our team is executing exceptionally well. And so we continue to think that the way the investments are going in China will continue to do well at Qualitrol into '18. At least, we expect that. I think I mentioned and you didn't ask it, a little bit of -- we did note that we are seeing a little sluggishness in the Middle East, particularly in places like Saudi Arabia. So we've seen the balance just as we look out in the near term. We think a strong China certainly overwhelms that. But we are seeing pockets of things where we are seeing a little bit of budgetary constraints.

Got it. And Jim, I wanted ask about Jacobs Vehicle Systems. I mean, that has been down and now it actually turns out high single-digit growth. So can you talk about the outlook for that business? Is it going to be with the heavy truck market coming back here, a high single digit growth business going forward? What do you see in that business?

Well, I think you're exactly right. We've had just an outstanding strong business there in China over the last couple years. We really built a great business there. But as you know, the North American market was sort of offsetting that until recently. So North America market getting better. Probably next year, still not at peak levels, but probably certainly better than this year. We've got a little bit of mix with Europe where we're losing some business in Europe that'll probably slow the business down a little bit that's maybe take a little bit off the growth rate. But we would anticipate at least for sure North America and China growing next year. And overall, the business will grow.

Our next question comes from John Inch with Deutsche Bank.

Jim, the low single digit growth, did you call out any of the businesses? I couldn't -- I can't remember from your answer. Did you call out any of the businesses in the fourth quarter that you're expecting to perhaps slow sequentially?

Yes, I'll give them back to you. We would expect Gilbarco to probably sequentially be down in the fourth. They were not down in the third, so that's probably the biggest change of really trajectory sequentially.

Okay, that makes sense. Were there deal costs, Chuck, in the quarter that kind of kept the PI margins a little bit lower in terms of the sequential down?

I'm thinking through the answer, in the sequential margins down. There were deal -- certainly, deal costs in the quarter. We've looked through them for -- from the earnings per share, adjusted earnings per share. So they're not really hurting our OP margins at all.

I was just thinking, PI margins were over 24% in the second quarter and they were down. But obviously, I'm just wondering if deal costs played a significant role in that, that's all.

So let me come back to you on specifically -- I know we had it. I'm just wondering on that on the margin expansion that you're talking about, how that rolled in there, but it likely did.

Okay. Landauer, it obviously fits. Depending on how you look at it, right, it looks pretty pricey. I'm sure you're going to get the benefits out of it over time. Your other -- the rest of your pipeline, should we be expecting -- because it was a little bit of headline shock. Should we be expecting similar types of multiple revenue types of deals coming forth or was this kind of the priciest of the ones and it just happened to hit?

Well, we did 3 deals in the quarter. All had different profiles, all had similar return profiles. So as you know, we tend to focus on returns, so that's -- I certainly think that there will be times when a great asset becomes available and we will really -- if we can get the right return, we will take the opportunity. That doesn't mean that there's a new trend here. As I mentioned before, prices are higher for some things. But we've been really disciplined. I think we found a number of things. What we paid for Orpak, as an example, was -- I think was very good. So if you look over time and you look over what we've got, I certainly think you're going to see a mix of prices as you look at multiples of revenue or multiples of EBITDA. But I think on balance, you'll see us still maintain a discipline around returns and, on occasion, you'll see those situations where the opportunity is so good for a transformational like thing that we'll take advantage of it.

But you would admit that Landauer would be screening that toward the high end of what the...

Yes, I would say Landauer is going to typically be at the high end of that, that's for sure.

John, sorry to interrupt you. I just have the answer back on the transaction costs are about 140 bps impacting Q3 of this year in PI.

Okay. So that kind of helps to explain the sequential trend. That's perfect.

On a sequential, yes. We're still up year-over-year.

You are, you are. You just actually had a really good quarter in PI last quarter, so it just made the sequential compare tough. Let me ask then just lastly here. We're obviously, once again, over this air pocket, going to roll into some pretty nice growth rates at EMV. Probably going to go on for 2 or 3 years. Then there's a this whole notional kind of concept of the cliff. And I'm just curious, Jim and Chuck, how are you thinking about that now? Is it so far out it doesn't really matter? Or do you actually think about beginning to manage around that so that could be adding to the diversity of the GVR business or it could be actually potentially divesting it beforehand? Or what -- is it just -- how would you respond to that kind of concept today?

Well, I think it is a transformational like situation. But I think what we've try to do is do a couple of things. And it isn't too far out for us to be thinking about it, so that's maybe the first question. As you know, we have a broad discussion around strategy for a long period of time amongst all our business, not only amongst with Chuck and I, but also with the board around what are our degrees of freedom. I think there's a couple of things that we're really watching. One, we're building out transportation technologies with a number of opportunities to really make sure that we're taking advantage of all the kinds of disruptive technologies that are really going on. And that certainly will be something that we'll see some of the things were talking about. We're building a global business at Gilbarco Veeder-Root. So the acquisition we just did with Orpak is helping us build out our high-growth infrastructure. And you see some of those things with some of the successes we've had, for instance, on global dispensers that we described in the prepared remarks. So we're certainly taking -- making sure that we're looking through this. And then the other thing we're trying to do is build more recurring revenue models so that yes, we might see it dip, but we won't necessarily see the dip in margins. So our Insite360 strategy is really bringing on all -- a number of sites to make sure that we've got recurring revenue with those sites, adding to that with more software over time. And there's a number of those strategies that are going to work to mitigate that while at the same time, trying to determine how we can best take on that business in ways that will be -- will mitigate any potential bubble out there. So we're certainly working on it. I think it's a little early to be very specific about what we're actually doing, but we have a number of things going on right now that are working to -- we've talked a lot about things like Insite360 and some of the payment things we're trying to do as well to build this business for the long term, which ultimately keeps -- maybe has a little bit of a downturn in that revenue and specifically at Gilbarco North America, but on balance is offset in a number of other parts of the portfolio.

Yes, and you've got time to work it through.

Right.

Our next question comes from Joe Ritchie with Goldman Sachs.

This is Evelyn Chow on for Joe. Maybe starting with Matco for a second. I know last quarter, you had some softness in the storage area. It seems like overall trends are moving in the right direction. As you think about this business and what you're hearing from your dealers and your customer surveys, at what point do you kind of feel this can get back to you that low to mid-single-digit type grower?

Yes, I think what we've highlighted in the prepared remarks was that tool storage was still weak, so we've continued to see sort of the high ticket items, Evelyn, sort of still be more challenged in the portfolio. We think that's pretty well tied to mechanics' hours and what's going on there. We see less hours with mechanics, less dollars in their pocket, less likely to buy the high ticket items. We did see some of our diagnostic lines have really good growth. So and then some of the day-to-day stuff is still doing pretty well. So we expect that some of those challenges will continue to happen through likely the first part of next year. That's when you start to see the vehicle production that happened in 2010 start to take on. We think about vehicles that are 7 or 8 years old as a big part, and so what we're seeing right now is that '08, '09 dip in vehicles coming into that age where they need the most maintenance. So as the '10 and '11 vehicle production numbers come in, you'll start to see those mechanics hours bump up. And that's roughly around the summertime of next year.

That's very helpful. And then maybe revisiting something from last quarter. I know Keithley had a great quarter in 3D sensing. I think at the time, you were kind of still gauging the overall broad opportunity for your business. Just wondering how that thinking has evolved.

Yes, we probably won't see anything right now. There's -- as we look at our type of solution and the kinds of applications that exist, I know everybody thinks that all 3D sensing opportunities are alike, but they're not. And so we do think that there will be opportunities in '18 and '19 for 3D sensing. We would expect to see some revenue from that, but that's a customer-by-customer story and not as broad-based as maybe the overall theme is going. So we feel good about what's going on in Tektronix, and Keithley, we feel like we'll have a real opportunity to take advantage of a number of opportunities. One of them to be 3D sensing, but it's not necessarily the massive trend for us that sometimes you read about when you think more broadly about that technology.

Our next question comes from Joe Giordano with Cowen.

Maybe just -- most of my stuff has been answered. Just a question on Landauer. So can you talk us through what the growth, organic growth has been there for the last couple of years? And how do you guys -- is most of the -- your philosophy to grow that business more leveraging your existing businesses, like you talk about Fluke, ISC? Or do you have -- like what's your strategy to grow that business on its own outside of potential revenue synergies with other stuff you have?

So I think they were flat for a couple years. They've been growing this year. But they were flat for a couple years based on a number of things, one of which was a challenged ERP implementation that was really hurting them from a resource perspective. We think they're on a better trajectory right now. As I mentioned before, we think being able to utilize some synergy that we have with our global footprint, leveraging the bigger business will essentially double the size of our health care biomedical business with the addition of Landauer. And the combination of that will really create, we think, a number of growth opportunities, growth initiatives to bring some solutions -- new solutions, but also to leverage a global go-to-market in ways that, quite frankly, Landauer couldn't necessarily leverage at their size. So that's really where the opportunity, and we think we can turn it into a grower here. They've been growing last couple quarters, so we think we'll continue to be able to manage that growth over the next several years. But it'll take a little while to get some of that work done. Some of that is not stuff that happens in a quarter or 2. But in order to get the -- we feel we get a really good return there. It's a combination of some, obviously, the opportunities to bring FBS to the organization, but also to deliver accelerated growth in the business as well.

Is it more of like a new product introduction upgrade kind of call there? And remind me just what the recurring element is? I know it's high, but I forget exactly how much.

The recurring is close to 90. I think it's little bit above 85, so it's a very good recurring revenue model. And it'll be -- they have some good technology, so we feel good about their technology. We'll obviously continue to invest in innovation. That's one of the things that's, I think, a hallmark of our business, so we'll continue to do that. And I suspect that'll create some new opportunities, but I think we'll get a good -- some of the growth will certainly come from this geographic expansion of the current product portfolio.

Our next question comes from Patrick Newton with Stifel.

Most have been asked and answered so I have somewhat of a nuanced question on Tektronix. I believe that this business is #1 in services within its targeted markets. And we've seen a major initiative from Keysight to focus its business on both servicing its own equipment and also third-party equipment. I'm just curious if you're seeing any changes in the services market giving this competitive initiative.

Well, yes. I think, obviously, everybody -- the first initiative that everybody tries to do is to service their own equipment. That's -- I think that's -- and generally have an advantage in doing that. And then as you said, the multi-vendor services opportunity. We had a very good quarter in services at Tek this quarter. So we feel like we're actually getting a little bit of tailwind in the business from some of the work we've done and feel good about it. So it's a big market. There's a lot of third-party people. It would be more than a right assumption to think that both us and Keysight could clearly grow in the market together as we -- because there are -- the market is mostly third-party labs and calibration houses that do that work around the world. So the opportunity for OEMs to do this is still pretty big even if they're not necessarily competing.

Great. And I guess just shifting gears back to an earlier question you had on 3D sensing. You kind of said that for a market for Fortive that it's perhaps not as big or as broad as some of the 3D sensing applications. And I'm curious why that is? Because I believe that your initial initiative that Keithley gained traction in actually was on the very widely known consumer electronics release with the iPhone X and facial recognition. And perhaps I'm wrong, but why is that test application not widely applicable to similar consumer electronics types of applications? Or perhaps I'm missing something within your prior answer.

Well, first, I would never comment on the customer of ours, given our inability to comment on what customers we have there. I think first and foremost, there are specific applications where we do pretty well. I think it has something to do with the level of quality and how you approach the testing. So not every consumer electronics customer approaches testing that way. There's a couple different ways to get the means to the ends, if you will, from a testing compliance capability and certain companies don't go the same direction as others. So we've latched onto a certain technique, if you will, that really bodes well for how we do it in our technology. That isn't necessarily everybody who will do things like facial recognition. But that said, we do think there is a broader opportunity here and we are building out some capability from a applications perspective to be able to build solutions for some of the broader applications that might exist. We just -- it's very, very early days and it would be premature to comment on the success or failure of that at this point.

Ladies and gentlemen, that will conclude our question-and-answer session for today's call. I will now hand it back over to Lisa for any additional or closing remarks.

Thanks, Kristen. I'll take it. Thanks, everybody, for being on the call today. We're exceptionally excited about the third quarter, sunsetting kind of our 1-year anniversary of doing the call on our own. And we're really excited about what we've got going here in the fourth quarter and into 2018. We'll see many of you here shortly as we're out and about, and we'll look forward to seeing you then and giving you our guidance in February. Obviously, Lisa and Josh are available for any questions or follow-ups and we'll look forward to seeing you soon. Thanks, and have a great evening.

Ladies and gentlemen, thank you for joining us for our Fortive Corporation Third Quarter 2017 Earnings Results Call. Thank you. You may now disconnect, and have a wonderful night.