Fortive Corp (FTV) 2025 Q3 法說會逐字稿

My name is [Brock] and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's third quarter 2025 earnings results conference call. (Operator Instructions).

I would now like to turn the call over to Ms. Christina Jones, Vice President of Investor Relations. Ms. Jones, you may begin your conference.

Thank you, and thank you, everyone, for joining us on today's call. I am joined today by Olumide Soroye, Fortive's President and CEO; and Mark Okerstrom, Fortive's CFO. As a reminder, we successfully completed the separation of our Precision Technology segment, now operating independently as rallying on June 28, 2025.

Today's call marks Fortive's first quarterly results under our new structure. During today's call, we present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com.

We will also 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 that we make today.

Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K, and the subsequent quarterly reports on Form 10-Q. 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.

Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. Our results and outlook discussed today are on a continuing operations basis, unless otherwise specified.

With that, I'll turn the call over to Olumide.

Thank you, Christina. Let me begin on slide 3 with a few key messages. Q3 was our first quarter as new Fortive, following our successful spin-off of Ralliant. We are now a simpler, more focused company with a clear strategy, poised to create meaningful shareholder value. Our Q3 results offer a waypoint along our path towards creating exceptional returns for shareholders in the years ahead.

Four highlights I would like to call out. First, our teams are executing very well with laser focused on driving profitable organic growth with the power of our Fortive business system. This grew solid results ahead of our expectations, including core growth of roughly 2%, adjusted EBITDA growth of 10% and adjusted EPS growth of 15%.

Though we aspire for much better as we continue executing our growth strategy, we're pleased to see acceleration in the business. Second, we are raising our full year adjusted EPS guidance. We now expect to deliver between $2.63 and $2.67 per share, reflecting our adjusted EPS overperformance in the third quarter, the impact of incremental Q3 buybacks and are otherwise unchanged view on Q4.

Third, we deployed capital in the quarter in accordance with our new approach, anchored in delivering strongest related returns for shareholders. During the third quarter, we deployed $1 billion to share repurchases retiring approximately 21 million shares or 6% of our fully diluted share count.

Finally, the financial framework we outlined at our June Investor Day remains fully intact. And our Fortive Accelerated strategy is now in execution mode. We are focused on delivering benchmark beating shareholder returns by leveraging FBS to accelerate profitable organic growth allocating capital intelligently to optimize shareholder returns over the medium to long term and rebuilding investor trust. It is early days, but we couldn't be more excited for the road ahead.

Before we dive into our Q3 results, let me highlight some examples of the progress we are making in executing our Fortive Accelerated strategy on slide 4. Our strategy to drive faster organic growth is built around fleet costs, innovation acceleration, commercial acceleration and recurring customer value, all powered by our amplified Fortive Business System and enhanced by our disciplined capital allocation approach.

We made meaningful progress in advancing our strategy in Q3. Starting with innovation acceleration. Our new product introduction velocity continues to accelerate, as a result of our renewed focus on customer-centric innovation. During the quarter, we had several notable product launches, including service channels, SaaS how to release, which introduces AI powered walker insights and streamlined payment solutions.

Additionally, Fluke continued its innovation momentum with the GFL 1500 solar ground fault locator. This marks a photo foray into the high-growth solar operations vertical and increases customer productivity by reducing troubleshooting time and decrease in hazard exposures.

In the quarter, we also launched a new innovation studio in Nashville, Tennessee and opened a new customer expense center at ASP's headquarters in Irvine, California. Both [powers] build to foster collaboration accelerate innovation and deepen customer relationships.

Turning to commercial acceleration. We further intensified our commercial focus on faster-growing end markets and regions. And though it is early, we are starting to see green shoots in several areas. In our iOS segment, for example, we have begun to put in place a series of commercial initiatives in North America to enhance our focus and deploy more resources towards high-growth verticals like solar operations, distributed in data centers and defense.

We are seeing the early signs of impact in North America Q3 performance. We also recently stepped up our efforts in South Asia, including India, as that region continues to see exceptional economic growth. We saw significant acceleration in the region across both segments, and we are confident that our enhanced regional presence will drive strong momentum in this high-growth region in the years to come.

Moving on to recurring customer value. We remain focused on increasing recurring revenues. Here again, we are early in our journey and have meaningful runway ahead of us. In the quarter, Fluke continued to make great progress on increasing its percentage of recurring revenue, through enhancements to our maintenance software and further expansion of our service plan offerings. And in general, we saw recurring revenue growth continue to outpace our consolidated growth.

Finally, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. Our capital deployment priorities for new Fortive [are clear] invest in organic growth or see accretive bolt-on M&A return capital through share repurchases and maintain a modest growing dividend, all with a focus on best relative returns and maximizing medium- to long-term shareholder value.

Consistent with these priorities, we repurchased about 21 million shares in the third quarter, reflecting our belief in the attractive relative return of share buybacks at the valuations we saw in the quarter. We have also revamped our M&A funnel and process to reflect our different M&A strategy going forward. Focus on accretive, smaller bolt-on M&A which meet our stringent strategic and financial criteria.

With that, I'll turn it over to Mark to walk through our financial results for the third quarter.

Thanks, Olumide. I'll begin with slide 5. In the third quarter, we delivered total revenue of just over $1 billion, up roughly 2% year-over-year on both a reported and a core basis. The market conditions remain dynamic, we were encouraged to see growth at both iOS and AHS, and modest outperformance versus our expectations in both segments.

In iOS, resilient customer demand drove better-than-expected results at both Fluke and our facilities and asset life cycle software businesses. In AHS, health care customers continue to exhibit caution, as they navigate recent changes to health care reimbursement and funding policy. However, we saw sequential improvement in demand for health care equipment and consumables and continued strength in health care software.

From a geographic perspective, North America showed solid growth, improving sequentially from Q2, driven by strengthening demand trends for professional instrumentation and health care equipment. Europe was down year-over-year and worsened modestly from Q2, driven by weakening macro conditions in the region. Rest of World was mixed.

Adjusted gross margin in the quarter was down about 60 basis points driven by tariff-related costs partially offset by pricing actions and supply chain countermeasures. Adjusted EBITDA was $309 million, up 10% year-over-year, with growth accelerating from Q2 levels. Adjusted EBITDA margin expanded approximately 200 basis points to 30%.

This strong operational performance was driven by operating leverage alongside deliberate organizational streamlining and an overall sharpened focus on core cost discipline. We delivered adjusted EPS of $0.68, up 15% year-over-year, a meaningful acceleration from Q2, driven by growth in adjusted EBITDA, favorable interest expense on lower debt balances and the positive year-over-year impact of share repurchases.

We estimate direct tariff costs, net of countermeasures, created a roughly $0.01 headwind to adjusted EPS in the quarter. We generated $266 million of free cash flow in the third quarter, and our Q3 trailing 12-month free cash flow grew to $922 million. Our Q3 trailing 12-month cash flow conversion on adjusted net income remains comfortably north of 100%.

Moving to our segment results, starting with Intelligent Operating Solutions on slide 6. Revenue for the segment grew just over 2.5% on a reported basis with core revenue growth of 2%, slightly ahead of our expectations. Growth was driven by demand for facility and as life cycle software rail demand for professional instrumentation despite tariff volatility and strong growth in gas detection products.

At Fluke, we saw an improvement in customer purchasing patterns drive modest growth with particular strength in North America, partially offset by continued softness in Europe related to macro conditions. While the acceleration is encouraging, ongoing volatility in global trade policy remains a source of uncertainty.

Our facilities and asset life cycle software businesses performed modestly ahead of expectations, supported by strong demand for multisite facility maintenance and marketplace software in North America. However, tighter fiscal policy and constraint funding continued to pressure on demand for our procurement and estimating solutions.

Our gas detection business is growing nicely with strong demand for our hardware as a service model to ensure worker safety with particular strength in North America and Latin America. Adjusted gross margin in the segment declined by just over 90 basis points year-over-year to 65.7%, primarily due to tariff cost pressures, partially offset by pricing and supply chain counter measures.

Adjusted EBITDA grew 7% to $242 million, accelerating from the more modest growth we saw in Q2, driven by operating leverage and reduced costs associated with flattening and rationalizing segment level organizational structures. Adjusted EBITDA margin grew to 34.6%, up from 33.3% in the prior year period.

Moving to our Advanced Healthcare Solutions segment on slide 7. We delivered total revenue of $328 million. Revenue grew approximately 2% year-over-year, just over 1% on a core basis. As we noted last quarter, we continue to see reimbursement and funding policy changes impact the AHS segment, specifically the deferral of US-based hospital capital expenditures on health care equipment.

However, demand trends in North America improved from two levels, driving sequential improvement in capital performance as some customers executed on deferred orders for sterilization and biomedical test equipment. Consumables demand also improved sequentially across most regions.

Encouragingly, our software products in the segment continued to deliver solid growth, fueled by strong execution and structural advantages from resilient SaaS-based revenue models. Our adjusted gross margin of 58.4% in the AHS segment, similar to last year.

Adjusted EBITDA grew approximately 7% year-over-year. Adjusted EBITDA margin expanded from roughly 27% to 28%, driven by operating leverage, flattened organizational structures, partially offset by modest incremental R&D investments.

Turning to slide 8. As noted earlier, we deployed just over $1 billion of capital to share repurchases in the third quarter, reflecting confidence in our ability to deliver on the core value creation plan represented by our Fortive Accelerated strategy and the attractive valuations we saw in the quarter.

We funded these repurchases with a combination of the remaining proceeds from the rally and spin-off dividend, cash on hand and increased commercial paper issuance in anticipation of continued strong free cash flow generation in the quarters ahead. As previously highlighted, our free cash flow on a trailing 12-month basis were $922 million.

Moving to slide 9. We are raising our full year adjusted EPS guidance to $2.63 to $2.67 per share. Our guidance reflects Q3 results ahead of our expectations, the impact of incremental buybacks in Q3 and otherwise no change to the view we held on Q4 as at our last earnings call. This outlook also assumes a continuation of the market dynamics we experienced as we exited Q3.

It also reflects current or known future tariff rates expected to go into effect through the end of the year with tariffs net of countermeasures, not expected to be material in the quarter. Let me provide a few additional modeling considerations. Based on what we see today, we are expecting overall core growth to moderate in Q4 with AHS core growth broadly in line with Q3 levels and very modest core growth at iOS.

We continue to expect a full year adjusted effective tax rate in the mid-teens and a Q4 tax rate in the single digits due to discrete tax items in the quarter. We also expect a sequential increase in net interest expense in Q4, reflecting our cash and debt levels at quarter end.

As a final note before turning it back to Olumide for closing remarks and Q&A, in our first quarter, most spin-off, we took important first steps to demonstrate our steadfast commitment to unrelenting execution on the Fortive accelerated 3 pillar value-creation plan that we outlined at our June Investor Day. We have much work left to do. The change is underway, and we are energized by the exciting work ahead of us.

I'll now turn it back over to Olumide.

Thanks, Mark. I'll close out our prepared remarks with a few reflections from my first quarter as CEO and offer a bit more color on the changes we have capitalized at Fortive in the past 100 days. First, our thesis behind the creation of new Fortive as a simpler, more focused company is showing promising early outcomes.

We have seen the benefits of simplification on our day-to-day operations enabling us to be notably more customer centric. With fewer operating brands, we've been able to simplify our organizational model and processes. That is freeing up more time across our team to focus on the source of growing our customers.

Personally, I have really enjoyed spending significantly more time with our cost in our cross both segments as we deepen relationships and uncover additional opportunities to accelerate growth. We have also flattened out our executive leadership team to ensure that business leaders in close proximity to our customers, have a stronger voice at the top of our company. With the hotels on customers across our portfolio, I am energized by the impact of our enhanced customer-centric approach will have on our growth trajectory.

Second, we are taking deliberate steps to accelerate growth. We have given our 10 operating brands more growth oxygen and encouraging them to freely and frequently suffice the next best organic growth opportunity that may have been under acquired in the past.

We have transformed our strategic planning process into a more aggressive growth for cost engine, and we are emerging from our recent strategic planning cycle with a robust pipeline of investable growth opportunities. And we are reviewing our unmarked financial planning, forecasting and governance processes to enable in-year investment into growth as overperformance materializes.

Third, our Fortive business system is powerful, not just for leadership and lean, but as a systematic growth engine. We are making great progress in evolving the mindset, kid enzyme tools of FBS to better sort growth, not just by integrating our AI center of excellence directly into our FBS team, but also by evolving and enhancing existing tool set and best practices around innovation, commercial acceleration and creating recurring customer value.

Finally, our new approach to capital allocation is very different from what it was in the past. Our dynamic and disciplined capital allocation approach has one singular purpose, maximizing medium- to long-term shareholder returns. And we have demonstrated our commitment to this approach in our first quarter as new Fortive.

We are pleased with our results this quarter, but we are not satisfied. We are driving hard towards our ambitious agenda and look forward to demonstrating continued and accelerated progress in the quarters and years ahead.

Thank you for your continued interest in Fortive. I especially want to thank our shareholders, our 100,000 customers, and all our Fortive employees around the world who do a tremendous job every day to deliver strong results and build enduring advantages in our businesses.

With that, I'll turn it to Christina for Q&A.

Thanks, Olumide. That concludes our prepared remarks. We are now ready for questions.

(Operator Instructions) Nigel Coe, Wolfe Research.

Thanks. Good morning. Good afternoon. It's been a long day. Thanks for the details. Obviously, the margin performance was to my mind, the real highlights. And it seems -- when I look at your sort of implied 4Q guide, it looks like you're not assuming much of a sequential pickup in EBITDA margins.

I mean, we're back into something in the range of about 31% EBITDA margin for the fourth quarter. So just curious, is there any sort of -- was it sort of start on lining kind of quarter on margin and you're assuming that repeats?

Any kind of details there, especially around some of the tariff offsets you expect in 4Q?

Hey, Nigel, how are you? Thanks for the question. So if you think about the over performance we delivered in Q3, a part of it was revenue performance, as you called out, a big chunk of it was cost discipline. And you can see that show up in the numbers, both in unallocated corporate costs and also in the segments.

Most of that was actually discrete actions that we took in the quarter really to start to free up resources for us ahead of annual planning, so that we could deploy against some of the initiatives that we're starting to see as part of the Fortive accelerated strategy to accelerate growth into 2026. So we do expect to redeploy some of the resources we freed up in the fourth quarter.

There were a few little one-timers incentive compensation, some increased capitalization of software development that happened in the quarter. We're going to maintain our cost discipline through the fourth quarter, to be sure. But we are going to reinvest some of it as we look forward here.

Okay. That's good color. And then my follow-on is really around the government shutdown. I think we hit the fourth week today. You called out some government funding pressure within Gordian. Just curious how that's impacting performance in October.

Yeah, thanks, Nigel. So the government business for us is mostly state and local government agencies. So in that sense, the federal government shutdown is not a big factor. Our direct exposure to federal government is relatively small, just a little bit in our FAL business and Fluke AHS.

It really just hasn't been a major factor for us right now. It's difficult to predict the duration of the shutdown and second level impacts of a prolonged shutdown. But we feel good about the guidance based on what we know today. And again, given it's not a big direct exposure to the federal government for us, we feel good about what we've laid out.

Deane Dray, RBC Capital Markets.

Thank you. Good day everyone. I was hoping just that circle up on capital allocation that was a sizable buyback in the quarter. Just kind of give us your thinking about the decision-making on doing buybacks? Is there an intrinsic value calculation you're doing internally? And then just the set up for M&A because you had been through this moratorium on deal making leading up to the spin. Where does that stand in priorities? Thank you.

Yeah. Thanks for the question, Deane. So we were quite pleased to be able to deploy $1 billion towards share repurchase in Q3. And that reflected just a strong free cash flow the rally and dividend proceeds and just the attractive valuation we saw for our shares in the quarter.

And like we've mentioned with respect to Fortive going forward, share repurchases will be a big part of our capital allocation option set. So anytime we see conditions like that, we'll continue to do that. To the extent that M&A is still part of our formula, we've been quite clear that we are not looking at transformational M&A.

We're looking at smaller bolt-on acquisitions that can accelerate the go-forward growth of our existing businesses. So it's a very different playbook on M&A. We are going to be more balanced across share repurchase and this bolt-on M&A acquisitions that we do.

Like we mentioned at our Investor Day, the formula we laid out for shareholder value creation in the next three years does not require us to do M&A. So from our point of view, we're going to take the path that offers the lowest risk to create value, and that for us does not include big M&A. So we continue to cultivate our funnel of proprietary bolt-on assets that smaller and can help our existing businesses.

But how we think about it? We do the analysis or point of what gives us the best relative returns between share repurchase and the M&A options that we have and in the third quarter specifically, the case was very clear, just given where the stock price was to deploy that heavy billion dollars repurchases.

That's really helpful. And just as a second question, I was hoping to get some color on Fluke in the quarter, it's such a good indicator of short-cycle demand. So anything about the sell-in versus sell-through channel inventory would be helpful. Thanks.

Yeah, Thanks, Deane. So we were quite pleased with Fluke in the quarter and having a return to growth in the quarter. All the fundamental metrics that set up the future looked really strong. We had order growth. POS continues to be really strong, especially in North America and stable in the rest of the world. Book-to-bill for the year continues to track north of one.

Channel inventory outside of South America, we've said all year being elevated, but that's been improving over the course of the year. So we're in a much better place than we're at the beginning of the year. And then on top of that, our team continues to accelerate product innovation.

I talked about a couple of those in the prepared remarks and also commercial execution that some markets both verticals like data center and defense that are doing really well right now and also geos like India that are doing very well. Our team continues to put a lot more horsepower behind those markets.

And then, we're driving more recurring revenues at Fluke, maintenance, software enhancements and additional service clients. So both by reason of how we did in Q3 at Fluke, the underlying metrics of the health of the business and then the actions the team is doing to really continue to accelerate growth, we feel quite good about the setup for the next three years at Fluke.

Scott Davis, Melius Research.

Hey guys. And congrats on the first full quarter was pretty clean. Guys, one of your competitors has been getting a lot of attention in the radiation test business that -- and I haven't read all talk about Landauer in a while. Can you get us up to speed on the outlook there and what you're seeing?

Yeah, thank you, Scott. So you're right, there's a lot of excitement in the Landauer business for us. As you know, it's one of the highly recurring parts of our AHS segment. So we like that attribute of the business. And we've said the current part of the company Fortive overall has been growing faster than our fleet average.

And Landauer is a great example of that. So it's continued to grow really strongly. And that comes from the fact that our customers really rely on us for this mission-critical radiation and monitoring. That's very -- it's a very stable need for customers.

They're looking for really the number one brand that it can trust and that helps joint commission reviews and other regulatory requirements they have to meet, much easier to meet. So we see a lot of strength in that business. The thing that I find exciting for us is the work that our team is doing on innovation. And that includes finding add-on services that we can tag on to our existing customer base.

We have tens of thousands of customers in that business. And so the idea of thinking about that business like the software business that you can add on to existing customers besides price and expansion to other --

Scott, you are breaking up. I can't hear you? Are you there?

Yes. Can you hear us?

It's breaking up. It could be our phone. It could be you guys I don't know. I'll pass it on because I don't want to be disruptive to the call.

Brock, are you hearing us, okay?

Julian Mitchell, Barclays.

Hi, good afternoon. Maybe just wanted to follow on the demand trends in AHS. Maybe help us understand sort of what's happening in terms of the equipment demand versus consumables. And you mentioned the policy and funding change headwinds, kind of how have you seen those play out affecting customer demand the past kind of couple of quarters. Just trying to understand if that headwind is getting worse or it's holding steady. And what does it mean as we're going into next year, please?

Yeah, thanks, Julian, for the question. So the AHS segment overall, just maybe to break you down. The software part of the business, really strong, continues to do really well. So we're quite pleased and excited about that acceleration in that part of the business.

With respect to capital equipment in the AHS segment, we talked last quarter about to your point, the reimbursement and funding policy changes and how that's causing some of these US hospitals to defer capital equipment purchase. What we've seen since then has been encouraging, which is sequential improvement in demand for health care capital in North America based on just more certainty around the legislative conditions that they're operating under, they're still walking through the full kind of long-term effects of the OB3 Act.

But we certainly see improvement in the demand patterns significantly in September, especially because we have a funnel of [deals and] we know what things were deferred. And we began to see more and more of those get funded in September, and we expect that trend to continue through the rest of the year. So the sequential improvement in that capital equipment purchase, we quite like.

We see the same sequential improvement in consumables as well, and our biggest markets continue to grow in consumables. So overall, I'd say software doing well, the capital equipment piece, we're seeing sequential improvement, and that's quicken in September and into October as well. And then the consumables continues to be solid.

That's great. And maybe one for Mark, just very much a CFO-type question, so apologies for that, the tax rate outlook, I think this year's sort of overall adjusted P&L tax rate is maybe 14%, something like that. I just wondered, is that sort of a normal run rate in future kind of best view on the next sort of year or two any perspectives on that you could provide?

I'm happy to, always happy to answer your CFO questions. I think it's a good framework to think about right now mid-teens. The Pillar 2 proposals that are out there, there is some risk that to the extent that the US is not excluded from that, which is current thinking, although it's not written into law that we could see something higher. But right now, from what we see, I think mid-teens is a good way to model the tax rate through 2026 at least.

Stephen Tusa, JP Morgan.

Hey, good afternoon, and congrats on a solid quarter, good execution. The software business, the FAL business, what are you guys seeing in the other businesses? I think you mentioned some of the construction, I guess, related to drags. But are you seeing -- how are your customers kind of treating your part of the budgets there from a kind of an IT spending perspective are you guys seeing there?

Yeah, thanks, Steve. So FAL, overall, we like -- we continue to see growth in that platform. So we quite like that. And the components of that, the service channel brand really great pull through. We talked about some of the AI-powered work order insights we're adding to that platform, which is an expansion for existing customers.

They love that. I think for customers, they view file software as a good way to scale the impact of AI because we have real network but around this business. So IT spending around that to the extent that we're helping them capture the value of AI is really, really strong right now. So we quite like that.

And then the Gordian software part, which is really around planning facility planning software, also continues to do really well. We talked last quarter about the new products we launched (technical difficulty) capital planning.

The order growth in that business has been terrific, separately from the procurement part of Gordian, that's been a terrific story for us from a software point of view. And then [EVERETT] continues the improvement that we've talked about over several quarters now. So overall, I think just given the nature of what our software does or customer and the fact that in the grand scheme, it's a small spend with very high return on investment that helps them on monetization and getting real value out of AI use cases.

It's been a strong part of our story. And that's why we said the recurring revenue part of the company has been growing much faster than the fleet average.

Got it. So FAL grew what in the quarter? Was FAL above the -- like what was the organic at FAL in the quarter in total?

Yeah, so FAL grew in total in the quarter, and you can think about it as helpful to the fleet average.

Andy Kaplowitz, Citi.

Hey, good morning everyone, good afternoon. So I think one of the primary goals you have or you had as you split is to simplify your overall business. So obviously, the first quarter out of the gate with good margin is a good signpost for that. But maybe talk about where you are in terms of that self-help. I know it's early, but should we get increasing impact from that simplification as we go into '26.

Yeah, no, thank you, Andy. I think the short answer is yes. If you think about what we've laid out as our plan here. The plan is we have a simpler company in the [sten] branch, which means, frankly, we can simplify how we run the company, free up more time to spend with customers to spend on growth.

And like Mark mentioned, we've also created space in our P&L, as you saw with the big margin expansion in Q3, so we can actually put some more investment behind this growth ideas. So all of that's in motion right now. would expect that to keep building momentum for growth as we come out of this year.

And then I'd say, secondly, the other thing that's been quite important in this change with the company is the capital allocation strategy. So not only are we going to grow the company faster and the seeds we're planting around products, commercial and requiring value is playing through on that.

But we are also going to significantly shift how we think about capital allocation. And you saw that with the share repurchase that we did in Q3 here. And as we go forward, you're going to see that balance continue to play out. And so we're one quarter in 100 days into the journey and I would expect that the best is still ahead of us yet.

Helpful. And then could you give us some more color on what you're seeing in demand by region? I think you asked pretty good. I think you mentioned Western Europe maybe downshifted a little China. Like what are you seeing across your end markets by geography?

Yeah, no, I think you have it generally right. I would say the style of the show continues to be North America real strong performance in North America. I think part of that's the market, part of that's going to are keen really have pushed hard from an innovation point of view in some of the best end markets, data centers and so on in the US especially, but also just the market conditions have been more favorable for us.

And then on the other hand, I'd say Western Europe, especially has been the softest market for us. And that's been the case most of the Q2 got a little bit better in Western Europe, but then that didn't really sustain in Q3. So we're not expecting anything to get dramatically better in Western Europe for the rest of the year. So we kind of plan that in here and anything better will be upside for us. And then the rest of the world was just mixed.

And generally stable, I'd say, in China and mixed everywhere else. So North America, really good, Western Europe really soft, everything else in the middle.

Jeffrey Sprague, Vertical Research Partners.

Hey, hello, everyone. Thank you. Hey, just wanted to get a little bit better sense of maybe the margin trajectory. First off, can you just elaborate a little bit more. You said there was some one timers in the quarter, and I don't know if there was a change in capitalization policy or something? Did that all run through corporate? And then essentially, you're saying that you're using that benefit in Q3 to spend for growth in Q4.

Can you just put a little bit more color or detail around that and correct me if I'm wrong there.

Yeah, sure, happy to Jeff. So there were a few one-timers in the quarter. There were two primary drivers. One was just increased capitalization rates at some of our software companies as they were building a new product that was not yet sort of deployed into live production. So that was one impact. That basically lowers R&D and then ultimately will come back in the future as that's amortized in.

The second was that we did have some adjustments to incentive compensation and that was a good guy as well. Those items hit a combination of the segments and the corporate costs. the expectation, even though we are actually making direct cost reductions to actually fund growth is that overall OpEx will step back up in the fourth quarter as we don't repeat some of these one-timers as we start to pull in some of the investment ideas that we've got as part of the strategic planning exercise and annual planning exercise that Olumide laid out.

But we're going to maintain discipline and we expect to still have a strong margin profile. But overall, OpEx should pop back up a bit in the fourth quarter.

Does the -- I mean trying to triangulate between what you gave us in making an educated guess on interest expense and everything and the share count. It looks like you're sort of guiding segment level margins I don't know, kind of flat-ish in Q4 on a year-over-year basis. Is that correct?

I think you're in the zone. You're going to get a year-over-year basis out of the corporate or year-on-year expansion out of the corporate cost. But you're broadly in the zone, you'll see some pressure in gross margin, particularly in iOS, that then is largely offset sort of below the gross margin line.

Joseph O'Dea, Wells Fargo.

Hi, thanks for taking my questions. We wanted to just get a little bit more color on comments around giving brands more growth oxygen, which sounds like an exciting initiative. We, I guess, saw the Q3 R&D down, but maybe that's a little bit more non-repeat. I'm just curious in terms of what exactly is encompassed in sort of resourcing the growth oxygen for 10 operating brands and how to think about the time of that sort of flowing through to organic growth kind of impact?

Yeah, thanks for that. thanks for that. Let me just describe what it is that we've done. So what we've done in the first 100 days here is, we've gone through our strategic planning process with each of our 10 brands. And the nature of that is really digging to find the best ideas for organic growth acceleration. And maybe we're on the leverage so far.

And it may be really compelling enhancement products for customers. It could be commercial capacity expansion in attractive markets like data center or India, or it could be expansion to add-on services or software offerings for customers. that we just haven't had the space in our P&L to get to. So we went through a process to really assemble all of those ideas across our brands. And I'm just incredibly impressed by the slate of pragmatic and actionable ideas that came out from that process.

So we now have this funnel of terrific ideas that we're getting after very aggressively. And what we've then done is to say, look, we are going to be very disciplined in assessing which of those have the highest confidence and the best return potential. And for those ones, we'll make space on the P&L.

That's what we mean by group oxygen to make to fund those and to get them done. So some of the margin expansion we got in Q3 that we talked about, we are going to save some of that to invest over the course of Q4 here to really think about it as a surge in guessing those great ideas, execute it faster.

So as we go into '26, they're having a lot of impact, keeping in mind that some of them are short time to impact things like commercial capacity add, some of which are market and demand gen add. So we feel quite good about the setup and the space we've created in the P&L to get after this and really give us businesses more.

As we call it, growth oxygen that maybe they've hired historically when we've been really tight across the board, but it's just really been intentional in planting seeds that will power the growth that the case that we've made is the growth, and so we're planting the seeds for that.

And then on organic growth, composition and sort of thinking about the price and volume piece and volume kind of slightly down in the quarter, is the setup that you think the volume decline rate is actually a little steeper into the end of the year? Is that partly comps? And then just any color on where you see the best opportunity for volume to get a little bit better, maybe areas that you're watching most closely?

Yeah, I mean, so again, a few ways should think about that. One is we like what we're seeing from pricing this year because I think in many ways, that's a reflection of the value of those brands. And so we -- and some of it is in the benefit of tariffs and we're covering that. But on the all of it, it's been an affirmation that we can get price in this business.

So we expect that to continue. And the exciting thing for us is a lot of the growth ideas I talked about are really about volume. And I would say, across our businesses, we see real upside from volume. And I think if you think about our biggest brands in Fluke and the AHS segment, those are areas where we have very specific ideas that can help with volume growth over the next year here going into '26.

So we certainly expect the price kind of strength to continue to be a big contributor to our growth. And in the volume piece of the math will get better over the course of our journey here the next year to three. So that's what we would expect.

Chris Snyder, Morgan Stanley.

Thank you. I wanted to follow up on some of the Q4 commentary. I mean, I think you guys said you expect organic growth to moderate in Q4 relative to Q3. Is that just a function of a more difficult comp? Or did some of the Q2 disruption get pushed into Q3 revenue. So maybe that was a little bit overstated versus demand? Any color there would be helpful. Thank you.

Sure. Happy to answer that, Chris. There are a few things that are happening. One is that in Q4, we do have a little bit of a tougher comp. If you look at the script commentary from last year, we talked about some pull forward from Q2 into Q4.

I think it's particularly acute in the iOS segment. There was, I think, a little bit of a snapback in Q3 in terms of just some of that $30 million coming back. I would just say, though, overall, the trends that we're seeing across the iOS segment and the AHS segment are broadly consistent.

They're encouraging. I think as Olumide said, we've got lots of optimism for better volume growth as we step into 2026, but we do have some timing-related impacts that are sort of shifting things from Q2 to Q3 and then out at Q4.

Thank you. I appreciate that. And then maybe just a follow-up on AHS. From the outside looking in, it's very difficult to kind of have a sense for the performance versus the health care policy and funding challenges that could be coming or maybe leaving the market based on the policy. So I guess it seems like you guys think AHS will have another pretty solid quarter here in Q4. But I guess what gives you guys confidence that the North America health care spend can be supportive or resilient through just a kind of a choppy, hard-to-predict policy backdrop. Thank you.

Yeah, no, thanks for that. Thanks for that. I mean, overall, we like the AHS part that's set up here. So if you think about it, this time last year, AHS segment grew 9% and organic growth in Q3 of 24%, 6% for the year overall. And so we know what the capacity of this business is.

And despite the choppiness of 2025 with all the health care related policy changes. Our businesses continue to do the right things for our customers, the depth of customer loyalty, customer support and have experiences personally just been helped a lot of our customers in that segment is incredibly strong.

So we like us set up. We like what we're doing with respect to innovation, we like what we're doing with respect to kind of the commercial engagement with customers and recurring value that we're adding to those customers across all our brands. So that piece, we really like.

And then if you think about the fundamental kind of spend and demand profile of health care in the US. Whatever is going on in the end, it still comes down to the basic fact that we've got aging demographics we've got increasingly sophisticated health care options and intervention options for this aging demographics, a lot of which have two or more chronic conditions.

We continue to have shortage in provider capacity. That means the kinds of solutions that we bring to drive productivity and safety are going to be incredibly supported by this tailwind over the next three to five years. So irrespective of the choppiness of policy decisions in '25.

We like what we're doing on innovation, on commercial and recurring value. And we like the underlying sustained circular trends that make this health care and especially the industrial part of health care that we forecast be a good market to be in. So that's kind of where we forecast is play for what's going to create value beyond quarter-to-quarter noisiness in the space. We really like the business and we think we're well set up.

Jamie Cook, Truist Securities.

Hi, good afternoon, I guess. A couple -- two quick questions. One, you talked about Fortive accelerated innovation acceleration, commercial acceleration, like all these opportunities to sort of ignite growth profitably. Just to be clear, I mean, it doesn't sound like you embed any of that in your guidance -- so just wondering if there's opportunity for upside on the top line as some of these initiatives go through.

And then just my second follow-up question. The $63.6 million in other on the adjusted operating profit, what -- I mean that's usually trends, I guess, in the low 30s. Can you just break apart like what was in that number and then what's implied for the fourth quarter? Thank you.

Thanks for the question. I'll take the first part, and then I'll have Mark take the second one. The way we think about it is we laid out at our Investor Day in June, our financial framework for the two-year period '26, '27 and that -- the premise of that is the company we now have is going to be [3% to 4%] organic growth, and then after 2027 gets better than that.

And then we'll have, imagine expansion, 50 basis points to 200 basis points and then adjusted EPS growth, that's a high single-digit plus growth. So that financial framework befits from all of these Fortive Accelerated initiatives. That's what gives us confidence that financial framework remains intact. And so that's where you're going to see the impact of it.

But with respect for the guide for this year, we feel good about the way we've reflected the macro conditions and all the forces at work across the three areas we've talked about on tariffs and health care spending and state and local government spending.

And we -- that's all reflected in guide for this year. But the way to think about our Fortive Accelerated strategy and the impact of that is it really is what gives us complete confidence in the financial framework that we laid out for '26, '27.

And then I'll let Mark touch on the second part of the question.

Yeah. I think, Jamie, we'll get back to that. I think you're referring to that other operating income in the AHS segment. So just give us a bit -- I'll circle back with you on that. Maybe we can go to the next question.

Joseph Giordano, TD Cowen.

Hi, good afternoon. This is Chris on for Jeff. You had called out the growth, the double-digit growth in recurring revenue and you noted that it was outpacing the overall average. Where do you see recurring revenue potentially ending up as a percent of total in the longer term? And what are some key levers that you have in both segments to sustain that above corporate average trajectory?

Yeah, thanks for the question. So we like the recurring revenue percentage continuing to go up. And we don't -- we've deliberately not still in on our high dose. So we expect it to continue to grow and have no limit on what's possible over time.

The second thing I'd say is if you think about the pieces of company today that are still not recurring. And then you think about how quickly those can change, we still do have some incredibly powerful professional instrumentation offerings at Fluke. That's the biggest chunk of our business that's nonrecurring. Now that business was almost 0% recurring 10 years ago. And if you go back five years ago, it was probably 5%, 6% recurring.

Today, it's $0.15 recurring. So the biggest lever for us to keep driving recurring revenue is continuing to attach more recurring things Fluke. And we also have some examples from businesses that were mostly transactional like Industrial Scientific 10 years ago, and we've shifted those to more hardware as a service recurring offerings.

And again, that gives us a little bit of a template of some of the things we could do for some of our offerings at Fluke as well is shift them to more of a hardware as a service offering. So that's probably the single biggest bucket of revenues that will move to the most as we shift more of the company towards recurring.

And we're going to -- internationally, it's one of our 3 pillars for Fortive Accelerated. It's driving current customer [value].

The next question --

Operator, I'll just circle back on Jamie's question. That incremental expense was predominantly related to separation related stock compensation matters. So fair market about adjustments as well as the acceleration of certain executive compensation associated with the transition of leadership.

Andrew Buscaglia, BNP Paribas Asset Management.

Hi, good afternoon, everyone. You guys -- there's a lot of noise on the margin side, Q3 to Q4, but I'm looking at high level into '26, how volume depends on margins. And can we comment on some of these savings helping you expand in a low or no volume environment? And then another question is, any update on are there incremental stranded costs we'll see fall out in '26? Or where do we stand with that side of the story?

Yeah, thanks for the question. At this point, I would just turn your attention to the financial framework we laid out at Investor Day, which was again 3% to 4% revenue growth, 50 basis points to 100 basis points of adjusted EBITDA margin expansion and high single-digit plus adjusted EPS growth. We're in the middle of annual planning right now.

And really, we're just trying to strike balance between driving the appropriate amount of margin expansion along with accelerating growth, and we'll be able to give you a little bit more color on that, obviously, on our next call.

In terms of stranded costs, we're almost there. We took some other actions, as you saw in the third quarter. There is some stock comp related stranded costs that we'll be sort of working out. A lot of that sits in the segments, but we're almost there, probably in 6 to 12 months, we'll have the rest of it out. And as a reminder, I think we said we had $25 million that was out and there was $25 million left to go. It's probably half of that remaining for us to take out over the course of the next 6 to 12 months.

This now concludes our question-and-answer session. I would like to turn the floor back over to Olumide for closing comments.

Thanks, Brock, and thank you all for joining us. We really appreciate your interest in Fortive. We could not be more excited about the journey we're just starting here. And it's still early. We realize that some of you know us and some of you are new to us, but we are incredibly excited.

We have a simple playbook here. We've got a great portfolio. We believe we're going to drive faster profitable organic growth from this portfolio. We are going to continue to be very disciplined in terms of leverage down the P&L and our cost discipline with FBS helping us through that. And our capital allocation approach is going to be intelligently positioned to balance share repurchase and smaller bolt-on M&A.

We believe that, that formula and us doing what we said we'd do on that and building trust and maintaining trust will do incredible things for shareholder valuation in the next three years. So that's exciting for us. We hope it is for you as well. Thanks for joining, and we'll see you next time.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.