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    Fortive Corp (FTV)

    Fortive Corporation is a provider of essential technologies for connected workflow solutions across various attractive end-markets, operating through three strategic segments: Intelligent Operating Solutions (IOS), Precision Technologies (PT), and Advanced Healthcare Solutions (AHS) . The company offers advanced instrumentation, software, and services that enable mission-critical workflows in industries such as manufacturing, healthcare, and utilities . Fortive's global operational footprint is highlighted by deriving approximately 46% of its sales from customers outside the United States .

    1. Intelligent Operating Solutions (IOS) - Offers advanced instrumentation, software, and services that enable mission-critical workflows, including electrical test and measurement, facility and asset lifecycle software applications, and connected worker safety solutions, serving industries such as manufacturing, healthcare, and utilities .
    2. Precision Technologies (PT) - Focuses on solving technical challenges with products like electrical test and measurement and sensing technologies, catering to industries such as automotive, aerospace, and energy .
    3. Advanced Healthcare Solutions (AHS) - Provides critical workflow solutions for healthcare providers, including instrument sterilization, biomedical test tools, and clinical productivity software, ensuring safety and efficiency in healthcare environments .
    Initial Price$85.93April 1, 2024
    Final Price$72.12July 1, 2024
    Price Change$-13.81
    % Change-16.07%

    What went well

    • Recurring revenue is growing at low double digits, demonstrating the resiliency of Fortive's portfolio and supporting future growth .
    • Fortive is confident in driving double-digit EPS growth and double-digit free cash flow, even on slightly lower revenue than anticipated, highlighting strong operational execution .
    • Orders in the Precision Technologies segment are expected to grow in the second half, and the company is confident in this improvement .

    What went wrong

    • Customers are delaying orders due to macroeconomic and geopolitical uncertainties, particularly in military and government sectors, leading to pushouts in R&D investments, which may negatively impact Fortive's revenue growth.
    • Fortive's software businesses may face increased competition from cheaper AI-enabled products, posing a risk of customer churn and potential impact on growth, despite management's assurances to the contrary.
    • Analysts express skepticism regarding Fortive's optimistic revenue and margin guidance for the second half of the year, given smaller backlog and macroeconomic uncertainties, suggesting that achieving their targets may be challenging.

    Q&A Summary

    1. Revenue Guidance Confidence
      Q: How confident are you in your Q3 and Q4 revenue guide?
      A: We expect normal seasonality in revenue, with some businesses like IOS and AHS performing as expected, and we've derisked PT. On a two-year stack basis, our performance is similar. We anticipate orders in PT will grow in the second half, giving us confidence in our revenue outlook.

    2. Q4 Margin Increase
      Q: How will you achieve the significant Q4 margin increase?
      A: We expect margins to increase from 27% to over 29% in Q4, with about 60% sequential fall-through from Q3 to Q4, similar to last year's dynamics. This is driven by the top line, proactive restructuring, and productivity actions, resulting in yearly incrementals at 60%.

    3. 2025 EPS Target of $4.50
      Q: Can you still reach your 2025 EPS target of $4.50?
      A: While $4.50 is both aspirational and achievable, we remain confident due to tailwinds like health care and new product innovation. We may utilize buybacks and M&A to reach this goal and will provide an update as we get closer to 2025.

    4. Tektronix Performance Downturn
      Q: Why has Tektronix's expected performance declined?
      A: We now expect Tektronix core growth to be down low double digits, previously expected to be down mid-single-digit. This is due to mil/gov business moving out and China not recovering as anticipated. Despite this, the three-year CAGR remains mid-single digit.

    5. EA Revenue and Synergies
      Q: What is the outlook for EA revenue and capturing synergies?
      A: We have derisked EA, expecting revenue of $130 million, down from earlier expectations. Orders haven't disappeared but investments are pushed to 2025. Our synergy opportunities are ahead of plan, with the funnel doubling and setting up for future growth.

    6. China Growth Decline
      Q: How is China's performance affecting results?
      A: China has worsened within our guide, but the rest of Asia is performing better. China now represents about 10% of sales, with high-growth markets excluding China at 14%. We have reduced our expectations for China due to the slower-than-anticipated recovery.

    7. Cuts in Cyclical Markets
      Q: Are you late in adjusting to cyclical market downturns?
      A: We don't believe we're late. Unusual factors like mil/gov spending delays and China's government actions not gaining traction have impacted us. We have been prepared from a cost perspective, ensuring strong margins and EPS growth despite lower revenue.

    8. Software Competitive Risks
      Q: Are cheaper AI-enabled products causing risks to your software business?
      A: We are not seeing disintermediation or competitive threats. Accruent and ServiceChannel are accelerating, and we believe in leveraging AI within our vertical expertise. We remain confident in our software businesses and their positions.

    9. M&A Strategy Focus
      Q: How are you approaching M&A given current market conditions?
      A: We'll continue to be selective and disciplined in our M&A strategy, focusing on bolt-on acquisitions that strengthen our workflows and growth platforms. We are not seeing many deals transacted currently due to valuation misalignments, but feel confident in our acquisition strategy's long-term benefits.

    10. Pricing Outlook
      Q: What is your pricing outlook for the rest of the year?
      A: We expect overall pricing to be in the 2%–3% range, consistent with the first half. In health care, we're working hard to incorporate pricing into contracts. This outlook reflects a slight moderation from prior years.

    11. Bridging to 2025 EPS Target
      Q: How will you bridge to the 2025 EPS target with incremental improvements?
      A: With IOS and AHS on a good path towards 2025, we plan to continue cost savings and productivity measures, particularly in PT. We'll manage spending to stay on the right glide path to achieve our EPS goals.

    12. AHS Growth Prospects
      Q: Is AHS set for an extended period of good growth?
      A: Yes, the ASP business has been performing well for several quarters, and we're launching new product innovations. With the innovation flywheel moving and strong commercial execution, we're optimistic about sustained growth in AHS.

    13. Industrial and Factory Automation Trends
      Q: Can you characterize recent trends in industrial and factory automation?
      A: Health care and IOS performed well throughout the quarter. Fluke had a strong quarter, with the industrial business up mid-single digits. However, larger projects are moving to the right, and China's recovery is being pushed out, affecting the Sensing side within PT.

    14. Customer Investment Delays
      Q: Why are customers pushing investments to the right?
      A: Customers are delaying investments due to a combination of geopolitical uncertainties and macroeconomic factors. In mil/gov, uncertainties around defense budgets lead to R&D investment delays, as these are easier to postpone than production spending.

    15. Lower Tax Guidance
      Q: What's driving the lower tax guidance for the second half?
      A: The main factor is the deferral of Pillar 2 minimum global tax rate impacts, which won't affect us this year. This resulted in a lower expected tax rate for the second half.

    16. IOS Margin Performance
      Q: Why were IOS margins down year-over-year in Q2?
      A: Margins were down nominally by 20 basis points due to mix. On a two-year stack, margins are up 300 basis points, and we expect margin expansion to continue at a normal rate in Q3 and Q4.

    17. Europe and Asia Sales Outlook
      Q: What's your confidence level in Europe and Asia sales guidance?
      A: We've slightly lowered our expectations for Europe but maintained guidance within the low single-digit range. Health care is performing well in Europe. For Asia, while China has worsened, the rest of Asia is better, supporting our maintained guidance.

    18. Preparedness for Market Changes
      Q: How are you adjusting to changing market conditions?
      A: We've derisked our outlook where appropriate and continue to focus on cost management and productivity. Our portfolio's resiliency allows us to maintain strong margins and EPS growth even with lower revenues.

    NamePositionStart DateShort Bio
    James A. LicoPresident and CEO (Retiring upon spin-off completion)July 2016James A. Lico has served as the President and CEO of Fortive Corporation since July 2016. He previously held leadership roles at Danaher Corporation, including Executive Vice President from 2005 to 2016. He will retire after the spin-off .
    Charles E. McLaughlinSenior Vice President and CFO (Retiring by end of Q1 2025)July 2016Charles E. McLaughlin has been the Senior Vice President and CFO of Fortive since July 2016. He was previously the Senior Vice President-Diagnostics Group CFO at Danaher. He plans to retire by the end of Q1 2025 .
    Tamara S. NewcombePresident and CEO of Precision Technologies and Advanced Healthcare Solutions; Upcoming President and CEO of NewCoJanuary 2022 (Precision Technologies), June 2023 (Advanced Healthcare Solutions)Tami Newcombe has been President and CEO of Precision Technologies since January 2022 and Advanced Healthcare Solutions since June 2023. She will become President and CEO of NewCo after the spin-off .
    Jonathan L. SchwarzSenior Vice President, Corporate DevelopmentFebruary 2021Jonathan L. Schwarz has served as Senior Vice President, Corporate Development at Fortive since February 2021. He was previously Vice President, Strategy and Corporate Development .
    Edward R. SimmonsSenior Vice President, StrategyFebruary 2021Edward R. Simmons has been Senior Vice President, Strategy at Fortive since February 2021. He was formerly President of Vista Consulting Group at Vista Equity Partners .
    Olumide SoroyePresident and CEO of Intelligent Operating Solutions; Upcoming President and CEO of FortiveAugust 2021Olumide Soroye has been President and CEO of Intelligent Operating Solutions since August 2021. He will become President and CEO of Fortive following the spin-off .
    Peter C. UnderwoodSenior Vice President, General CounselMay 2016Peter C. Underwood has served as Senior Vice President, General Counsel of Fortive since May 2016. He was previously Vice President, General Counsel, and Secretary of Regal Beloit Corporation .
    Stacey A. WalkerSenior Vice President, Human ResourcesJuly 2016Stacey A. Walker has been Senior Vice President, Human Resources of Fortive since July 2016. She held various positions at Danaher, including Vice President-Talent Management .
    1. Given the rise of cheaper AI-enabled products posing risks of churn and disintermediation, particularly for Accruent and ServiceChannel, what specific strategies are you implementing to protect and enhance your competitive position in the software market?

    2. With the Precision Technologies segment facing headwinds from customer caution and macro uncertainty leading to OEM and channel weakness, can you elaborate on how you plan to counter these challenges and what gives you confidence in projecting order growth in the second half?

    3. Your forecast shows a significant sequential margin increase from Q3 to Q4, rising from 27% to over 29%; what are the key drivers behind this expected margin expansion, and how are you mitigating the risks that could prevent you from achieving it?

    4. Regarding your capital deployment plans, including M&A and share buybacks, how do you intend to reach your five-year accretion targets by 2025, and can you achieve these goals without a significant change in your current capital allocation strategy?

    5. Considering that increased R&D investments are impacting margins without immediate growth benefits, when do you anticipate these investments will translate into meaningful revenue contributions, and how does this timing align with your overall strategic objectives?

    Program DetailsProgram 1
    Approval DateFebruary 17, 2022
    End Date/DurationNo expiration date
    Total additional amount20 million shares initially, increased by 11 million shares on January 23, 2024
    Remaining authorization amount14.2 million shares as of September 27, 2024
    DetailsThe program may be suspended or discontinued at any time by the Board of Directors

    Q3 2024 Earnings Call

    • Issued Period: Q3 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Revenue Growth:
        • Q3: 3% to 4.5% with core growth of 2% to 3.5%.
        • FY: Total growth of 3% to 4%, approximately 1.5% lower than prior guidance.
      • Adjusted Operating Profit Margin:
        • Q3: Approximately 27%, up over 100 basis points year-over-year.
        • FY: 27% to 27.5%, up 100 to 150 basis points year-over-year.
      • Adjusted Diluted EPS:
        • Q3: $0.92 to $0.95, up 8% to 12%.
        • FY: $3.80 to $3.86, up 11% to 13% year-over-year.
      • Free Cash Flow: Q3: Approximately $360 million.
      • Effective Tax Rate: FY: Approximately 12% .

    Q2 2024 Earnings Call

    • Issued Period: Q2 2024
    • Guided Period: Q3 2024 and FY 2024
    • Guidance:
      • Revenue Growth:
        • Q3: 3% to 4.5% with core growth of 2% to 3.5%.
        • FY: Total growth of 3% to 4%, approximately 1.5% lower than prior guidance.
      • Adjusted Operating Profit Margin:
        • Q3: Approximately 27%, up over 100 basis points year-over-year.
        • FY: 27% to 27.5%, up 100 to 150 basis points year-over-year.
      • Adjusted Diluted EPS:
        • Q3: $0.92 to $0.95, up 8% to 12%.
        • FY: $3.80 to $3.86, up 11% to 13% year-over-year.
      • Free Cash Flow: Q3: Approximately $360 million.
      • Effective Tax Rate: FY: Approximately 12% .

    Q1 2024 Earnings Call

    • Issued Period: Q1 2024
    • Guided Period: Q2 2024 and FY 2024
    • Guidance:
      • Revenue Growth:
        • Q2: 2% to 3%, with core flat to 2%.
        • FY: Total growth of 4.5% to 6%, including FX headwind and divestiture impacts.
      • Adjusted Operating Profit Margin:
        • Q2: Approximately 26.7%, up 75 basis points year-over-year.
        • FY: 27% to 27.5%.
      • Adjusted Diluted EPS:
        • Q2: $0.90 to $0.93, up 6% to 9%.
        • FY: $3.77 to $3.86, up 10% to 13% year-over-year.
      • Free Cash Flow:
        • Q2: $270 million.
        • FY: Approximately $1.39 billion, representing 11% growth year-over-year.
      • Effective Tax Rate: FY: 14% to 14.5% .

    Q4 2023 Earnings Call

    • Issued Period: Q4 2023
    • Guided Period: Q1 2024 and FY 2024
    • Guidance:
      • Revenue Growth:
        • Q1: 3% to 5%.
        • FY: Total growth of 6% to 8%.
      • Adjusted Operating Profit Margin:
        • Q1: Approximately 24.8%.
        • FY: Approximately 27%.
      • Adjusted Diluted EPS:
        • Q1: $0.77 to $0.80, up 3% to 7%.
        • FY: $3.73 to $3.85, up 9% to 12%.
      • Free Cash Flow: FY: Approximately $1.38 billion.
      • Effective Tax Rate: FY: 14.5% to 15%.
      • Segment-Specific Guidance:
        • IOS: Mid-single-digit core growth and margin expansion.
        • PT: Revenues up 10% at midpoint, with core growth up slightly.
        • AHS: Mid-single-digit core growth, with margin expansion .