Fortive (FTV) Q3 2026 Earnings Call Transcript

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 four, 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 Mark to walk through our financial results for the third quarter in more detail.

Mark Okerstrom:Thanks, Olumide. I'll begin with slide five. 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 50-100 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 six. 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. Orders growth again accelerated from an already strong pace in the second quarter, and book-to-bill remained above one, reflecting the success of Fluke's strategic repositioning towards higher growth applications as part of our Fortive Accelerated strategy.

We delivered growth in all regions, again led by North America and complemented by acceleration in Europe. We also continued to invest behind strategic growth priorities, including data centers, defense, and early in career technicians, where we see attractive opportunities to extend our market leadership and enhance the durable growth profile of our largest operating brand. Growth in Facilities and Asset Lifecycle Solutions also accelerated in the third quarter, led by sustained outperformance in multi-site facility maintenance and marketplace software at ServiceChannel, as well as planning and procurement solutions at Gordian. We believe this performance reflect the early benefits of our commercial and innovation investments, which are driving deeper customer engagement and increased demand for our AI-enhanced solutions.

Growth in our gas detection business also increased sequentially, driven by growing demand for our worker safety solutions, including our hardware-as-a-service offerings in North America, Europe, and the Middle East, all bolstered by Fortive Accelerated investments in expanded commercial capabilities across the globe. Adjusted gross margin in the segment was just under 65%, roughly flat sequentially and down 90 basis points year-over-year, primarily due to strong growth from some of our lower-margin products serving select multi-site retail customers with high strategic value, partially offset by operating leverage.

Q3 Adjusted EBITDA in the segment grew 13% to $275 million, driven by adjusted gross profit growth, operating leverage, and discrete structural cost savings, partially offset by growth investments, including sales and marketing and R&D investments at Fluke and Industrial Scientific. Adjusted EBITDA margin for Q3 expanded by 120 basis points year-over-year to just under 36%, reflecting the strength of our operating performance and continued cost discipline. Moving to our Advanced Healthcare Solutions segment on slide seven, we delivered total revenue of $340 million. Revenue grew 3.7% year-over-year and 3.1% on a core basis. Q3 growth was broad-based and benefited from momentum in several areas.

Low-temperature sterilization capital contributed to growth in the quarter, and we saw solid demand for healthcare consumables, including in Latin America and APAC. Biomedical testing equipment and radiation monitoring solutions showed strong growth in the quarter, and Provation's SaaS products continued to deliver accretive growth driven by solid provider demand for our gastrointestinal case documentation solution and strategic initiatives to expand to adjacent specialties and regions. Adjusted gross margin in the segment was 57.5%, down 90 basis points year-over-year, driven primarily by product mix, including strength in emerging market consumable sales, partially offset by operating leverage.

Q3 Adjusted EBITDA in the segment was modestly ahead of our expectations at $88 million, down 5% year-over-year, driven by growth investments and the lapping of certain discrete cost benefits realized in Q3 of last year, partially offset by operating leverage. Adjusted EBITDA margin contracted by 230 basis points year-over-year on these same factors, but remained essentially flat sequentially at 26%. The year-over-year headwind from the annualization of prior year discrete cost benefits was roughly 100 basis points. We continue to invest in attractive AHS growth opportunities and remain fully confident that over the medium term, these investments will drive core growth and margin expansion in the segment. Turning to slide eight.

As noted earlier, we deployed $300 million to share repurchases in the third quarter, reflecting our disciplined capital allocation approach. As a result, we had 302 million diluted shares outstanding at the end of Q3. Since the launch of new Fortive, we've deployed $2.3 billion to share repurchases, meaningfully enhancing our adjusted EPS growth and return on equity. In terms of M&A, we continue to evaluate high-quality, accretive bolt-on deals that meet our rigorous strategic and financial criteria and deliver superior returns relative to alternative uses of capital.

As new Fortive, we have completed several bolt-on acquisitions, including Aeroqual and UV Smart, and these acquisitions are performing solidly in line with our deal cases, and we expect them to contribute to accelerating growth over the years to come. We were also pleased to raise our quarterly dividend by 17% in Q3, consistent with our desire to maintain a modest and growing dividend. From a balance sheet perspective, we finished the quarter at 2.6x gross debt to Adjusted EBITDA, modestly deleveraging from last quarter, and solidly within our financial policy of keeping ordinary course leverage within a range around 2.5x gross debt to Adjusted EBITDA. Moving to slide nine.

We are raising our full year 2026 adjusted EPS guidance range to $3.10-$3.14 per share, representing just over 15% year-over-year growth at the midpoint and reflecting strong year-to-date performance and confidence in the trajectory of the business. This outlook assumes a continuation of the market dynamics we experienced in Q3 and reflects current tariff rates. Let me provide a few additional considerations to assist with modeling. In terms of the full year, based on current foreign exchange rates, we now expect full year reported revenue just north of $4.4 billion and full year core growth just north of 5%.

We expect full year Adjusted EBITDA margin expansion around the midpoint of the 50-100 basis points range outlined in our medium-term financial framework. We expect full year net interest expense of approximately $145 million. Regarding Q4, as we mentioned last quarter, Q4 will have four fewer selling days versus the prior year's quarter. This will drive about a $15 million-$20 million headwind to reported revenue and a 150 basis point headwind to core growth in the fourth quarter. At the segment level, this translates into a 100 basis point headwind to core growth in IOS and a 300 basis point headwind in AHS. We expect IOS core growth to continue to outperform AHS on a normalized basis.

We expect FX and M&A combined to be about a 50 basis point tailwind to reported revenue in Q4, and we continue to expect a Q4 effective tax rate in the low double-digit range. As a final note, before turning it back to Olumide for closing remarks and Q&A, our year-to-date results show that our Fortive Accelerated strategy is working. We remain fully confident in our medium-term financial framework from Investor Day, and our sights remain keenly focused on delivering benchmark-beating returns for our shareholders over the medium to long term. I'll now turn it back over to Olumide.

Olumide Soroye:Thanks, Mark. Let me close with a few observations on the quarter and where we're headed. Q3 was another strong quarter for Fortive. We delivered over 7% core growth, approximately 10% adjusted EBITDA growth, and our fifth consecutive quarter of double-digit adjusted EPS growth. We are seeing our Fortive Accelerated strategy translate into stronger operating and financial performance, and our teams remain intensely focused on executing strategic initiatives to further accelerate profitable growth. We are maintaining a disciplined approach to capital allocation, returning meaningful capital to shareholders while pursuing attractive bolt-on acquisitions that meet our rigorous strategic and financial criteria. We remain highly confident that our Fortive Accelerated strategy will unlock significant value for our shareholders.

With that, I'll turn it back to Christina to open the call for questions.

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

Operator:Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Julian Mitchell with JPMorgan. Please proceed with your questions.

Julian Mitchell:Hi. Good afternoon. Maybe just a first question, please, around the AHS margin outlook. Understood there's that 100 bps or so, I think headwind sort of one-off in the quarter. But absent that, sort of margins are still down, maybe a little bit of mix impact. If we take a step back, margins in AHS have been sort of flattish for a couple of years now. Just wondered if that's investment to drive up the organic sales growth rate from the sort of low single-digit trajectory it's been at, or that's what's needed just to stay with that organic growth where it is because of competitive reasons and innovation requirements and so forth.

Olumide Soroye:Hey, Julian. Thanks for the question. Maybe just to step back a little bit. We're just really excited about the profitable growth runway ahead for us at AHS. If you look at year-to-date versus last year, the top line core growth is at 4.5%, and we expect acceleration of full-year business as well. There may be quarterly variations based on timing of orders and selling days, but it all fits in that arc of top-line acceleration. The work we're doing this year is to set up AHS for a great run of multi-year acceleration in growth and margin expansion.

In doing that, we're making some deliberate investment this year in growing our install base to kind of power that flywheel of the razor/razor blade model we have at ASP as an example. We're building commercial capacity to gain share in key geos and ambulatory surgical centers, and we're investing in innovation that's going to extend our differentiation and power growth for years to come. Those are deliberate and time-bounded investments that we're making this year. On a long-term basis, we're really pleased with what we're able to do on a top-line growth and margin expansion point of view. But view this year very much as a year of setting the stage for the success of this segment.

We believe it's going to play a really key role in our multi-year value creation story. So there's short-term things that are happening, but doesn't change the long arc of opportunity we have in the segment.

Julian Mitchell:That is great. Thank you. My second one would be around the IOS segment, industrial and manufacturing end market within that. I think it was up low double digits for the second quarter running there, in terms of year-on-year growth. So very good performance. Maybe help flesh out any specific drivers around that, and what do you think about the sustainability of this very good growth in that industrial and manufacturing part of IOS?

Olumide Soroye:Yeah. I think the thing that we really like about IOS and the industrial and manufacturing part is the broad-based nature of the success that our teams are having. Literally across geo, across brands, across product categories, across price and volume. It is just great success. In that particular end market, Julian, that you pointed out, it is a whole range of drivers of that success, not a single item. We like that because to your point about durability and sustainability, that really speaks to the fact that we have a lot of ways to win, with so many engines firing at the same time for us in that segment and that end market.

So that is the way I would describe it. It is very broad-based, Julian.

Julian Mitchell:Great. Thank you.

Olumide Soroye:Thanks.

Operator:Thank you. Our next questions come from the line of Scott Davis with Melius Research. Please proceed with your questions.

Scott Davis:Hey. I guess it's still good morning out there and Christina, appreciate the call here on the call. I'm going to ask kind of a stupid question probably, but is there anything different you need to do to serve the data center market? I understand having a dedicated sales force perhaps, but is there anything different you need to do from a product perspective or product availability perspective or service or anything else otherwise?

Olumide Soroye:Yeah, no, thanks for the question. I'm going to take that question in the context of Fluke, which is our biggest operating brand and-

Scott Davis:Okay. Yeah.

Olumide Soroye:Doing incredibly well with our team executing at a high level. We're really excited about the data center opportunity. As you know, we participate in the construction and build-out phase, as well as in the enduring ongoing operations and maintenance of these data centers. We already are well-positioned with a broad portfolio of market-leading solutions. That ranges from power quality monitoring analytics to power calibration, high voltage diagnostics, electric ground fault detection. So we have a lot of things already, Scott, that really go into that segment, both in the initial construction certification and aftermarket.

The exciting work that our team's doing now is really ramping up the pace of innovation to come up with new products that solve problems that are new, for these hyperscaler data centers that didn't exist with conventional data centers. We have talked about the CertiFiber Max as an example of a product that is really designed for these really high gigabyte data centers, in a way that no one else is doing. That is pulling through everything else that we do in a data center. The work that we are doing is really adding more innovation like that and then building, as we talked about in our prepared remarks, our commercial capacity.

Because literally we just need a bigger sales team, a bigger specialized data center team to go take these exciting offerings to the range of customers we now have. We are on the chase, as you can imagine, intensely. We are excited about the upside ahead of us, and we are still early.

Scott Davis:Yeah, it makes sense. Switching gears, I do not know if you answered this question specifically in prepared remarks because I did not hear it. What are your customers telling you on the healthcare side as far as their capital spending budgets near medium, longer term? It feels like the hospital segment has been in kind of a recession forever. Is there any light at the end of the tunnel on kind of a replacement cycle out there that you guys could see perhaps in 2027 or so?

Olumide Soroye:Yeah, thanks for that. I have had a chance personally to spend time with our teams, with customers around the world in the healthcare segment. The way I would describe it overall, maybe just start with the U.S. market, is that the environment is improving with hospitals. They will continue to navigate through a dynamic kind of operation and policy environment. But procedure volumes overall remain healthy. Capital spending trends are more supportive than they were last year, and they continue to improve. They are still somewhat constrained.

We continue to see shift in elective procedures towards ambulatory surgery centers, which again, create an opportunity for us as our teams are now getting really good at being a leader in serving these ASCs. Overall, I would say the environment is stable to improving in the U.S. Outside of the U.S., it is a strong market. We are seeing there is a lot more spending going into healthcare in different pockets around the world for different reasons. Overall, stable and improving in the U.S. It is always dynamic, but we like the trend that we are seeing, and really good outside the U.S.

Overall, we will take our chances on our ability to execute and outperform the market on a market that is stable and improving.

Scott Davis:Okay. I'll pass it on. Thanks, and best of luck, Olumide. Appreciate it. Mark and Christina, see you guys.

Olumide Soroye:Yeah. Thanks, Scott.

Operator:Thank you. Our next question comes from the line of Alexander Virgo with Evercore ISI. Please proceed with your questions.

Alexander Virgo:Oh, yeah. Thanks very much, gentlemen. Christina, appreciate you taking this. I wonder if you could just talk a little more about two things. I guess I'm thinking more about IOS than AHS here, but I wonder if you could dig into the innovation momentum, any kind of sense of contribution you can give us in terms of how much it's giving you in terms of the organic growth. Then on the recurring revenue side, I just wondered whether you can give us any more color, any more sense or quantitative indications on growth there. That'd be really helpful. Thank you.

Olumide Soroye:Yeah, thanks for the question, Alexander. I'll just maybe go in reverse. With respect to recurring revenue growth, this is an exciting story for us. We saw really strong growth in both recurring and non-recurring revenue this quarter. It's an interesting time because the non-recurring revenue actually grew faster. That's driven by just really strong performance at our Fluke business. The interesting thing is we've always viewed recurring revenue as an indicator of durability, but it's not the only indicator of durability. Many of our hardware businesses that are in quotes, "non-recurring," have demonstrated exceptional durability through the strength of a brand, a differentiated technology, and kind of the recurring replacement cycles.

Fluke, as an example, is seeing order growth nonstop every quarter now for several years. That's as good as a recurring business. Overall, strong growth on both sides, but just interesting that the non-recurring actually grew faster in this quarter. From the point of view of innovation, we've talked about our Fortive Accelerated strategy as being anchored in this deep belief that we can grow this portfolio faster, organically, and profitably. Obviously, innovation is a key element of that. So is commercial and recurring customer value for the customers we already have. The contribution to innovation, you're seeing that show up across the brands.

The fact that we have Fluke and the IOS segment and every piece of the IOS segment growing at a pace that we saw here in the quarter, and the AHS segment accelerating from where they were last year to year to-date, 4.5% core growth. All of our brands are driving innovation, and that's showing up in those numbers. The way innovation shows up, it's sometimes in pricing power, it's sometimes in volume, and it's sometimes in just customer retention and loyalty. We're tracking those in detail, as we always do with our Fortive Business System, and we like the contribution from innovation.

Alexander Virgo:Very helpful. Thank you very much.

Olumide Soroye:Thanks.

Operator:Thank you. Our next question comes from the line of Quinn Fredrickson with Baird. Please proceed with your questions.

Quinn Fredrickson:Hey, good morning. Just wanted to ask about the fourth quarter outlook. I think if I got the moving pieces right, you might be applying kind of flattish core sales. I know you have the days impact and the comp is a little tougher. Is that just the main factors, or are there any other factors to be aware of that drives a little bit of the deceleration in 4Q core growth?

Mark Okerstrom:Sure, Quinn. Happy to take that. Just as a reminder of what we said, we're expecting core growth on a full year basis of just north of 5%. As you called out, there are the days factor, which is the primary sort of normalization in the quarter. It's 150 basis points on a consolidated basis, $50 million-$20 million on a reported basis. And we would expect that to hit roughly 100 basis points to IOS and about 300 basis points to AHS. But that's the primary driver. Again, we really like the course and speed of the business right now. We're carrying good momentum here coming out of the third quarter.

And the arc of the business is really one of acceleration.

Quinn Fredrickson:All right. Thank you for those details. Secondarily, just on pricing, in AHS, it looked like it took a step higher sequentially, about 280 basis points versus 190 last quarter. Should we think about that as a sustainable level of price contribution for the next few quarters?

Mark Okerstrom:I think about that range. I think a couple of hundred basis points, give or take, is a good marker. I think what you've seen in both IOS and AHS really goes to what Olumide was talking about, which is the teams have increased the pace of innovation that's enabled them to maintain strong pricing power. You saw that in AHS, you see that in IOS, and I would expect that to continue through the balance of the year and out through 2027.

Quinn Fredrickson:Great. Thanks, Mark.

Mark Okerstrom:You're welcome.

Operator:Thank you. Our next question comes from the line of Brandon Knutson with Morgan Stanley. Please proceed with your questions.

Brandon Knutson:Hey, good morning. Thanks for taking my question. You highlighted on the data center front increasing sales force there. It is focused on that market. Can you provide some tangible examples of how your investments in sales force, new product development, et cetera, are showing up in the business? Are you working with more hyperscalers? Are you outgrowing the market? Is it accelerating versus Q2? Any way to quantify the ROI you are seeing there? Then roughly what percent of your revenue is levered to data centers?

Olumide Soroye:Yeah. Well, let me start with the last part of your question there. Data center, like I mentioned, is just an incredibly exciting opportunity for us as a company. We are still very early. The way you see that is today, if you estimate how much of overall Fortive revenues is from data center ecosystem, it is still low single digits that we are talking about. So we are still really early. The investments we are making, knowing that it could be a lot bigger of an opportunity for us, includes things like the innovation.

So we now have a roadmap of innovation that is aimed towards solving problems for data centers and capturing opportunities in terms of actually realizing the value from the huge capital investments going into these data centers. We are, to your point, in deep discovery with a lot of the hyperscalers on what is needed. One of the things I enjoy is spending time with our teams at some of these hyperscalers. So we are really coming up with things that only Fluke, with our deep expertise in professional instrumentation, precision measurement can solve for them. We are going to be coming with more and more of those new products.

From a commercial point of view, you need, frankly, just feet on the street to cover the range of a number of hyperscalers, but not just hyperscalers, but it is also the building and construction firms that work with them. It is the technical advisors that work with them on designing and spec-ing out these data centers. It is not just in the U.S. We are doing that globally. So we are adding the capacity and the expertise we need to cover the market well and effectively. So those are the kinds of things that we are doing. From an ROI point of view, we are really happy with what we are seeing.

Frankly, we are supply constrained, frankly, at this point in terms of the talent and the capacity we want to build, because the market is certainly there for us.

Brandon Knutson:Great. Thank you. On IOS, you highlighted last quarter, I think that you've had the multi-site retailer mix increasing, driving headwinds on operating margins or gross margins. Same thing this quarter. Is that a dynamic that's getting bigger sequentially in terms of more activity there, or is it kind of consistent that we should expect going forward?

Mark Okerstrom:I would expect it broadly consistent. It was broadly consistent this quarter in terms of impact of what we saw last quarter. As a reminder, this is a product offering that ServiceChannel has where they are essentially the outsource providers for facility maintenance. One of the types of arrangements we enter into with strategic partners is an arrangement where we end up being the merchant of record on the spend. So optically, from a reported basis, it does sort of gross up the P&L to some extent.

But it's still a great business and we're going to continue to push it, but I would think about it as something that is not going to be an increasing factor for us going forward.

Brandon Knutson:Great. Thank you.

Mark Okerstrom:You're welcome.

Operator:Thank you. Our next question has come from the line of Nigel Coe with Wolfe Research. Please proceed with your questions.

Nigel Coe:Oh, thanks. Good morning, everyone. Good morning in your location, of course. Just want to stick on that topic, actually. I think we've covered the product cost mix issues, I think, in both segments. Mark, could you just talk about the inflation impacts? Because when you've got 60% gross margins, it's really tough to maintain the margin with the inflation. So just wondering if that's also a measurable impact. And then just within that, maybe just touch on where we are right now with the memory inflation and how that looks into next year.

Mark Okerstrom:Yeah, happy to take that, Nigel. And I think first of all, I would say that Fortive, by virtue of the incredible brands that we've got, the differentiated product offerings that we have, the power of the Fortive Business System has a long track record of real gross margin discipline, and we expect that to continue going forward. This quarter, we did see an increased impact from inflation, but price cost was strongly positive, and the teams just do an excellent job, this quarter being no exception, in offsetting inflation with value engineering, procurement activities, supply chain activities. And again, this was no exception. And when you layer price on top, again, strongly positive.

We did see particular inflation this quarter on electrical and electronic componentry. Freight was up more than we expected. The teams were, again, able to more than offset. It's a testament to what they've been able to achieve with Fortive Business System. And really in both segments, as you call out, the drivers of gross margin contraction, even though it's quite modest, was driven by mix shift and the ServiceChannel offering we mentioned, and then in the healthcare segment, driven by stronger growth in lower margin consumables, particularly in Asia and Latin America. So I think you're going to expect to see us continue to be able to drive strong gross margins going forward from quarter to quarter.

You may see mix impacts or we may make discrete investments, but strong gross margins is really part of the Fortive playbook.

Nigel Coe:Great. Thanks, Mark. That is good color. Olumide, maybe just double-click on what is going on in the FALS portfolio, and maybe the AHS software as well. Obviously, a lot of fluidity right now in software models. You have talked about some of the AI infusion initiatives in past quarters. I am just wondering, number one, catch us up in terms of what is happening with the specific logos. I think Accruent has been an area of maybe lagging growth. Maybe just bring us up to speed in terms of what is happening there.

Olumide Soroye:Yeah. Thanks, Nigel. A short answer is, we are very pleased with our software businesses across FAL and the healthcare software businesses in the quarter. I think from a FAL point of view, again, like I mentioned, the IOS segment performance, one of the beautiful things about it is it was not just Fluke, but FAL and gas detection, all contributed to that. We talked about a 9.1% growth for IOS in the quarter. All three components were pretty close to that range. Fluke was slightly ahead of the pack. The fact that FAL could deliver at that level, that was a strong indication. The strong performance in FAL was led by ServiceChannel and Gordian.

We continue to see really strong demand and adoption of the AI-enabled features that we have talked about the last couple of calls at ServiceChannel. Gordian had another strong quarter, led by our procurement and planning solutions. Accruent continues on its journey of improvement, and we like the role it is playing in the portfolio. Again, as it makes the FAL group deliver very strongly. On the healthcare side, the same thing. Our teams are doing a great job of deploying AI-enabled capabilities. We have talked about the AI pod voice documentation at Provation. They are doing a lot with leveraging the distinctive 30-year proprietary database that they have to generate new insights for customers that improve outcomes.

We are seeing that continue to power success. Overall, like we said the last few calls, not all software businesses are the same. The ones we have some deeply embedded strengths that are multidimensional, and we are seeing those play out really well, in terms of enable us to really turn AI into impact for customers, which is what they need.

Nigel Coe:That is great. Thank you.

Olumide Soroye:Thanks.

Operator:Thank you. Our next questions come from the line of Scott Graham with Seaport Research Partners. Please proceed with your questions.

Scott Graham:Yes. Hey, good morning. I wanted to maybe drill down a little bit into the components issues that was asked previously. Are you buying mostly memory or are you also buying a lot of logic?

Olumide Soroye:Yeah. So I will take that. Thanks for the question. So, if you think about our bill of material across our mainly our hardware businesses, so Fluke, ASP, kind of the Fluke Health Solutions business and Industrial Scientific. The bill of material has a little bit of logic in it. It has some memory in it. It is not the high-bandwidth memory that competes with some of the intensely demanding use cases right now. So they are really basic logic, some memory.

And what we are finding, and again, we have been in this sort of arena for a long time now, is that our teams are really good at making sure we have multiple sources of components, making sure that when there is something that looks like it is trending towards a choke point in terms of demand supply that may, not just kind of from an inflationary point of view, but hike up the price. We build up inventory in advance in the right places and the right pocket. We're not in a place where this is a big topic for us, in part because our bill of material doesn't have some of the more competitive components.

There are specific spots where we understand there could be exceptional inflation, and we manage that really well. We feel good. As Mark mentioned, price cost was strongly positive in the quarter. Our teams do a really good job on our components.

Scott Graham:Thank you for that. Just a follow-up would be, you mentioned the 100 basis point headwind in AHS. I was wondering if there was anything in IOS and what both segments look like on a headwind basis for the fourth quarter.

Mark Okerstrom:Yeah, happy to take that, Scott. I think you're probably referring to the EBITDA margin headwind in AHS. It was predominantly in AHS. There was a little bit of a headwind in IOS, as well. As you recall, in Q3 of last year, we talked about some of these discrete items, which were largely related to incentive compensation and some capitalized software development items. But most of the impact was in AHS. I think as we look forward, again, I would just call your attention to our prepared remarks.

We do continue to expect to be able to deliver EBITDA margin expansion on a full-year basis in the 50-100 basis point zone, and we talked about being in around the midpoint of that. So you can back into what that implies for Q4. But we like the momentum the business is carrying. I think as Olumide said, Fortive Accelerated is working, and over the medium term, we expect that to drive a good formula of accelerating core growth and even a margin expansion where we invest to drive more growth and also deliver to the bottom line.

Scott Graham:Okay. Thank you both.

Mark Okerstrom:Thank you.

Operator:Thank you. Our next questions come from the line of Andy Kaplowitz with Citigroup. Please proceed with your questions.

Andy Kaplowitz:Hello, everyone.

Olumide Soroye:Hey, Andy.

Andy Kaplowitz:Olumide, you gave us an update there. You've been talking about Fortive Accelerated today, but I think at your original Investor Day, you talked about getting to a higher growth state from the program versus the 3%-4% longer term expected core growth by 2028. Is it reasonable to assume that you're a bit ahead of plan on an innovation and commercialization, or is it just more accelerated market growth that you're seeing? I would assume it's reasonable to say that you'll have a higher contribution from innovation commercialization in 2027.

Olumide Soroye:Yeah, thanks for the question. I think if you go back to Mark's comments in our prepared remarks, that we're now for the full year tracking just north of 5% core growth for the year. I think that's kind of a fair indication that we're ahead of what we expected in terms of the 3%-4% 2026, 2027 medium-term financial framework. I think that is a combination of some of the markets we're in are just having a really strong year. The impact of the innovation commercial recurring customer value actions that our teams are taking continue to ramp, and we're still early in the ramp of those things. So we really like the setup looking into 2027 and 2028.

I think to your point, we did have the plus sign 2028 and beyond on that financial framework across core growth, Adjusted EBITDA margins, and adjusted EPS growth. Everything we're seeing is increasing our conviction that plus is certainly available to us. We're going to do everything we can to get to it as quickly as we can. Our teams are excited and executing at a high level.

Andy Kaplowitz:That's helpful. Olumide, maybe just a little more color on regional demand that you're seeing in IOS. I think you mentioned Americas had modest sequential growth, but Europe and Middle East accelerated, which is interesting. I was hoping you could comment a little more on that and then what you're seeing in China.

Olumide Soroye:Yeah. No, thanks for that. All the regions did really well. Again, it's great when you have a session where you're winning on multiple fronts. North America certainly continued to be the pace setter and the fastest grower. In Europe, we saw the region with a little bit of softness in Q2. POS, like I mentioned on the last earnings call, actually remained strong in Q2, even though others was a little bit slower. In Q3, we saw it bounce back. So we saw growth return. POS remained constructive in the region. I think the Middle East for us is again, it's 2% of our revenue, so it's small, but it continued to actually show real strength.

Again, in part because the things we do are essential and continue to be in demand, and our teams continue to do a really good job on making sure we can deliver in there. Thankfully, a lot of our business is oriented towards the Kingdom of Saudi Arabia, so we're still able to do what we need to do. APAC again really played a solid role for us. China remains somewhat challenged and choppy, but the rest of APAC, especially India, for example, more than compensated for that.

So across the regions, we like what we're seeing and the momentum that our businesses are building from building more commercial capacity in some of these markets and tailoring innovation for some of these markets. Specifically China. For China strategy, for example, continues, and we'll keep doing things like that to localize for this outside of the U.S. markets.

Andy Kaplowitz:Appreciate all the color.

Olumide Soroye:Thanks.

Operator:Thank you. Our next questions come from the line of Andrew Buscaglia with BNP Paribas. Please proceed with your questions.

Andrew Buscaglia:Hey, good afternoon, everyone.

Mark Okerstrom:Good afternoon.

Andrew Buscaglia:Wanted to dig into capital allocation a little bit. Since you have spun off or separated from Ralliant, you repurchased about 13% of your shares, it seems like. Going forward, I know you do still talk about M&A as on the table, but at these levels, what return hurdles in your mind make an acquisition more attractive than just continuing to buy back stock the way you have been?

Mark Okerstrom:Yeah, thanks. I will be happy to take that. As you call out, we have definitely had a bias over the course of the last five quarters to repurchasing our own shares. We do view M&A and share repurchase as interchangeable based upon relative returns. We have had a pretty attractive opportunity in our own stock, given the course and speed of the business, the free cash flow yield that we have seen compared to our after-tax cost of debt. I think looking forward, we have revamped our M&A engine completely. We have augmented the team. We have changed our approach. We are building funnel. We have executed a few small bolt-ons.

Obviously, we are seeking to make sure that return on invested capital is ahead of our WACC on a reasonable period. We are also looking at free cash flow per share and EPS accretion dilution on a comparative basis versus the two, taking into account the increased risk with M&A. I think, listen, looking forward, our hope is that M&A could be a bigger piece of the equation, and we like what we see from a funnel perspective. We will remain disciplined. We have got a couple of integrations under our belt that are performing really well, and we will continue to be dynamic based upon what we see.

Andrew Buscaglia:Maybe staying with the topic of M&A, I wonder based on kind of some of the comments you guys mentioned today on Advanced Healthcare, it seems it is a steady, albeit low-growth business, and you have some margin opportunity there. But is M&A tool you think you need to use to boost organic growth long term in that segment?

Olumide Soroye:Yeah. Well, look, I think the primary thesis in our Fortive Accelerated strategy is that we have the runway from a profitable organic growth acceleration point of view in both of these segments to create a lot of value for our shareholders. Our first order of business is the innovation, the commercial acceleration, and the recurring customer value work that our teams are doing. Bolt-on M&A is a sweetener, and we will do it in places where the financial and strategic criteria is compelling, to Max's point, versus share buybacks.

In our AHS segment, we have a lot of runway from organic execution, trying to get stronger propositions for ambulatory surgical centers, trying to refresh the innovation of our products, capture the impact of AI in our AHS software businesses. We have a lot to do. If we find things that are, no pun intended, surgically helpful to accelerate growth in the segment, we will do that. We talked about UV Smart on our last call. That was a great example of a very targeted bolt-on to ASP that brings in a new modality for disinfecting instruments of a very high value and highly important category to customers. So we will do things like that.

It will be very targeted and surgical. We do not think we need to bank on that to do what we need to do in the segment, but we will be targeted with it.

Andrew Buscaglia:Got it. Thank you.

Operator:Thank you. This does now conclude today's question and answer session. I would now like to hand the call back over to management for any closing remarks.

Olumide Soroye:Well, thank you, and thank you all for joining us today. We look forward to speaking with you next quarter. Have a great day.

Operator:Thank you. This does now conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.

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Fortive (FTV) Q3 2026 Earnings Call Transcript was originally published by The Motley Fool