Fortive Corporation 2026 Q3 Earnings Call

My name is Daryl, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's third quarter 2026 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two on your telephone keypad. 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. 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. 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, and our results and outlook discussed today are on a continuing operations basis. With that, I will turn the call over to Olumide.

Thank you, Christina. Thank you all for joining our call today. Let me begin on slide 3. Q3 marked our fifth consecutive quarter of strong execution and sequential core growth acceleration as we advance our Fortive Accelerated Strategy. Four key messages from the quarter. First, our teams delivered strong financial results, including core revenue growth of 7.2%, adjusted EBITDA growth of approximately 10%, and adjusted EPS growth of 13%. These results reflect continued organic growth acceleration driven by healthy customer demand and strong execution enabled by our Fortive Business System. Second, we maintained our disciplined approach to capital allocation. This quarter, we deployed another $300 million towards share repurchases, bringing total capital returned through share repurchases since the launch of new Fortive to $2.3 billion, representing 13% of shares outstanding. Third, our Fortive Accelerated Strategy is translating into improving business performance across the portfolio.

Our investments in innovation, commercial, and recurring customer value are driving faster profitable growth and reinforcing our confidence in the company's long-term value creation opportunity. Finally, we are raising our full year 2026 adjusted EPS guidance to $3.10-$3.14, up 15% year-over-year at the midpoint, reflecting our strong year-to-date performance and continued confidence in the trajectory of the business. Moving to slide 4, let me highlight some of the progress we are making in executing the three pillars of our Fortive Accelerated strategy. Starting with our first pillar, delivering faster, profitable organic growth. We are pleased with the progress we are seeing across innovation, commercial, and recurring customer value, all of which are building the foundation for durable, faster organic growth. This quarter, our innovation engine continued to generate new growth opportunities.

At Fluke, we expanded our innovation funnel with several new product introductions, including iSee Pro thermal and acoustic imagers, which broaden our reach to early-in-career technicians with intuitive entry-level diagnostic capabilities. At Industrial Scientific, we launched iNet Insights, a completely reimagined platform that helps customers manage sophisticated gas detection programs and large detector fleets while expanding the capabilities and value of our recurring iNet subscription offering. In Facilities and Asset Lifecycle Solutions, we continue to embed AI more deeply into customer workflows. For example, at ServiceChannel, our R2 release introduced new capabilities, including AI-powered asset recognition and intelligent agents that not only help create and route work orders but also identify stalled work orders, recommend next best actions, and help drive issues to resolution. On the commercial side, we maintained our focus on faster-growing end markets and regions where we have made deliberate targeted investments to capture growth.

At Fluke, we continue to build commercial capabilities aligned to our strategic growth priorities, including data centers, defense, and early-in-career technicians. During the quarter, we expanded our specialized data center sales capabilities and capacity, secured initial orders for our new early-in-career product bundle, and strengthened relationships with educational organizations to engage the next generation of skilled technicians. At Industrial Scientific, we continued to build commercial momentum for our recently acquired Aeroqual environmental monitoring business in North America and commenced manufacturing these products in our U.S. facilities, improving customer lead times and leveraging our combined footprint and Fortive Business System capabilities to drive greater operational efficiency. In healthcare, ASP and Provation continue to deepen engagement with ambulatory surgical centers through focused commercial resources, targeted partnerships, and innovative customer adoption pathways that expand our installed base and improve customer access to our solutions.

On our recurring customer value initiatives, we made further progress on deepening customer lifecycle engagement and improving revenue durability. In Q3, we again saw solid recurring revenue growth across both segments. As an example, at Fluke, recurring revenue growth was supported by continued momentum in our eMaint software platform, including increasing customer adoption of recently launched AI-enabled capabilities. During the quarter, eMaint secured several significant customer wins and continued to advance customer migrations to our next-generation platform. We are pleased that our Fortive Accelerated Growth initiatives are not only building a strong foundation for future sustainable profitable growth, but also increasingly translating to our current results, contributing to sequential core growth acceleration in each of the last five quarters since the launch of the Fortive. Moving to our second pillar, disciplined capital allocation is an integral component of our Fortive Accelerated strategy.

Consistent with our priorities, we deployed another $300 million towards share repurchases in the third quarter. We continue to evaluate high-quality bolt-on opportunities, and recent acquisitions are performing well and contributing to growth. Looking forward, our capital allocation priorities remain clear. Invest in organic growth, pursue bolt-on M&A where risk-adjusted returns exceed other uses of capital, return capital through share repurchases, and maintain a modest growing dividend, all with a focus on maximizing medium to long-term shareholder value. Moving to our final pillar, building and maintaining investor trust. We are pleased to deliver another quarter of strong performance ahead of expectations as we continue to build our track record of consistent execution. We remain fully confident in our medium-term financial framework from Investor Day. With that, I'll turn it over to Matt to walk through our financial results for the third quarter in more detail.

Thanks, Olumide. I'll begin with slide 5. In the third quarter, we delivered total revenue of $1.1 billion, up 8% year over year on a reported basis, and up 7% on a core basis. We saw price and volume growth in both segments, with particularly robust performance in our IOS segment. Growth was driven by accelerating demand for professional instrumentation, continued momentum in FAL's mission-critical enterprise software solutions, and ongoing strength in gas detection, reflecting the benefits of our growth investments and disciplined operational execution enabled by the Fortive Business System. Regarding core growth by geography, all major regions contributed to growth this quarter. North America remained our strongest-performing region and saw modest sequential acceleration in Q3. Revenue growth in Europe, Middle East, and Africa region accelerated with particular strength in professional instrumentation. APAC and LATAM also performed well.

Adjusted gross margin was about 63% of the quarter, down 80 basis points year over year. Adjusted gross margin performance was primarily driven by product mix dynamics, resulting from outsized growth in certain lower-margin products, partially offset by operating leverage. Price cost remained solidly positive in the quarter. While inflationary pressures have increased, the team continues to leverage the Fortive Business System, including sourcing and productivity countermeasures to offset inflation across both segments. Our industry-leading gross margins reflect both the differentiation of our products and the effectiveness of our Fortive Business System in sustaining those margins over time. The growth investments or mix shifts in any given quarter may cause fluctuations. These movements fit within a broader arc of strong gross margin discipline. Q3 adjusted EBITDA was $340 million, up 10% year over year.

This favorable performance was driven by adjusted gross profit growth, operating leverage, and discrete structural cost savings, partially offset by growth investments to support our Fortive Accelerated strategy. Adjusted EBITDA margin in the quarter expanded by 50 basis points year over year to 30.6%. Note that our consolidated adjusted EBITDA margins faced a roughly 50 basis point year over year headwind stemming from the annualization of certain discrete cost benefits we saw in Q3 of last year. We continue to be pleased with our ability to drive solid margin expansion and invest further into Fortive Accelerated strategic growth initiatives. We remain fully confident in our ability to deliver 50 to 100 basis points of annual adjusted EBITDA margin expansion as outlined in our medium-term financial framework.

We delivered adjusted earnings per share of $0.77 in Q3, up over 13% year-over-year, marking our fifth consecutive quarter of double-digit adjusted EPS growth. Strong adjusted EPS performance in Q3 was driven by growth in adjusted EBITDA and the positive year-over-year impact of share repurchases, partially offset by higher interest and tax expense. We generated over $280 million of free cash flow in the third quarter, with our trailing 12-month free cash flow above $1 billion and conversion on net income well north of 100%. Please note that during the quarter, we recognized an $18 million IEEPA tariff refund benefit in GAAP earnings and free cash flow. We expect another $5 million-$10 million of tariff refunds in the coming quarters.

As we did last quarter, we exclude the benefit of IEEPA tariff refunds from our adjusted earnings metrics and expect to continue doing so going forward. We do, however, include the benefit in free cash flow as the cash proceeds are real and available for deployment under our disciplined capital allocation framework. Moving to our segment results, starting with Intelligent Operating Solutions on slide 6. Revenue for the segment grew 10% on a reported basis, with core revenue growth accelerating to 9%. We are pleased to see broad momentum continue across the segment. Core growth acceleration was driven by robust volume growth in professional instrumentation, Facilities and Asset Lifecycle Solutions, and gas detection products. At Fluke, we delivered strong, broad-based growth led by our industrial and network product portfolios.