Fortive Corporation

My name is Erica, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fordham Corporation's third quarter 2020 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 the pound key. I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr. Whitney, you may begin your conference.

Thank you, Erica. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Liko, our President and Chief Executive Officer, and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortiv.com, under the heading Financial Information. We completed the divestiture of the automation and specialty business on October 1, 2018, and accordingly have included the results of the ANS business as discontinued operations for historical periods. The results presented on this call are based on continuing operations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis. During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2019, and 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. With that, I'd like to turn the call over to Jim. Thanks, Griffin, and good afternoon, everyone.

We are pleased with our third quarter results, as strong execution across the portfolio delivered a top-line performance that was significantly better than our initial guidance, as well as a return to year-over-year growth and adjusted operating profit and adjusted earnings per share. For the quarter, we reported adjusted diluted net earnings per share of 94 cents, an 8% increase year over year. While the operating environment remained challenging in Q3, we continued to successfully navigate the near-term headwinds. By leveraging the forwarded business system, we increased core operating margins by 160 basis points and generated another quarter of strong free cash flow while prioritizing growth investments across our portfolio to drive continued share gains. On October 9th, we completed the successful spinoff of Ontir Corporation, a global industrial technology company focused on mobility infrastructure. I'm extremely proud of the effort and the focus shown by our team throughout the year leading up to the separation, and I'm very excited about the future opportunities that lie ahead for both companies. The ability to maintain our readiness and execute this complex transaction, despite the obvious challenges presented by the COVID-19 pandemic, is a testament to the resilience and adaptability of our people and the power of FBS. At separate companies, Fortiv and Vontir are both well positioned to execute against their strategic priorities to generate increasing value for all our stakeholders. With the spinoff of Vontir Complete, Fortiv is well positioned as a provider of essential technologies for connected workflow solutions across a range of attractive end markets. We have strong established positions with leading brands that benefit from long-term secular growth drivers and have opportunities to increase recurring revenue. We have a long track record of disciplined capital allocation, significant balance sheet capacity and free cash flow, and substantial opportunities for both organic investment and strategic M&A across the portfolio. Most importantly, we have the Fortive business system, the cornerstone of our culture, and an enduring source of competitive advantage that underpins our commitment to continuous improvement. Since Vontir was part of Fortive throughout the third quarter, the financial results that we will discuss today include the Vontir businesses. However, because Vontir will be reporting their third quarter results on Thursday, on today's call, we will focus our commentary on the businesses that remain with Fortive. Also, the guidance that we provide today will be for Ford is continuing operations only. With that, let's turn to the details of the quarter. Adjusted net earnings were $338.5 million, up 8.8% from the prior year, and adjusted diluted net earnings per share were 94 cents. Total sales increased 2.3% to $1.9 billion, with core revenue essentially flat, reflecting significant sequential improvement from the prior quarter. Acquisitions contributed 220 basis points of growth, and favorable foreign currency exchange rates increased growth by 20 basis points. Adjusted gross margins were 51.8% in the third quarter, increasing 50 basis points year over year. Gross margins benefited from 50 basis points of price, the growing contribution of our higher margin software businesses, and disciplined supply chain execution. We also generated 160 basis points of core operating margin expansion, resulting in an adjusted operating profit margin of 22.7% for the quarter. Our ability to drive strong core OMX, despite the significant ongoing challenges posed by the pandemic, reflected the solid execution of our teams and the disciplined application of FBS. We continue to effectively manage the business through this uncertain environment, flexing cost actions as needed, while also investing in our strategic product development and innovation priorities to position us well for the future. During the third quarter, we generated $455 million of free cash flow, representing conversion of 134% of adjusted net earnings and an increase of 31% year over year. This performance took our year-to-date free cash flow up to approximately $1.1 billion, representing a year-over-year increase of approximately 48%. Despite a challenging environment over the past few quarters, our operating companies continue to use FBS to manage their working capital effectively in the short term, increasing inventory turns and limiting the headwinds from the sequentially improving top line. Turning to our segments. Professional instrumentation posted a total revenue increase of 0.9% despite a 3.5% decline in core revenue. Acquisitions contributed 370 basis points, while favorable foreign exchange rates increased growth by 70 basis points. Core operating margin increased 90 basis points, resulting in segment-level adjusted operating margin of 22.8%. Industrial technologies performed well in Q3, driven in particular by by the North American businesses of both Gabarco Vida Root and MADCO. Total revenue increased 4.5%, including a 5.5% increase in core revenue. Core operating margin increased 290 basis points, resulting in segment level adjusted operating margin of 25.9%. On slide nine of today's presentation, we show the region-by-region breakdown for the third quarter. Note that the growth rates shown on the slide reflect consolidated Fortiv Q3 growth, which includes the results of the volunteer businesses. That said, we will focus our operating company color primarily on the businesses that remain with Fortiv. In Asia, core revenue declined low single digits despite mid-single-digit growth in China. Strength in China was broad-based, highlighted by mid-teens' year-over-year growth at Fluke, double-digit growth at advanced sterilization products, and greater than 20% growth in sensing. Western Europe core revenue declined mid-single digits in Q3, highlighted by low double-digit growth at ASP. ASP has reported year-over-year growth in each quarter of 2020 thus far, driven by solid sales execution. Accruant also delivered a strong quarter in Western Europe, led by Meridian, its engineering information management solution, reflecting the momentum the company has built in the region. While point of sale remained negative for both Fluke and Tektronix, the point of sale trend improved throughout the quarter, and revenue at these businesses increased mid-teens versus the prior quarter. North America core revenue grew low single digits in Q3, showing broad-based sequential improvement versus Q2. Growth in North America was led by a strong quarter for the volunteer businesses. At New Fortive, a number of the software businesses continued to perform well, with growth across Intellect, E-Mate, and Census. Industrial Scientific's INET business and Qualtrol also performed well. As in Western Europe, Fluke and Tektronix saw improving point-of-sale trends, though still negative as we turn the corner into Q4. In recent quarters, we have laid out a framework for analyzing our portfolio, with businesses organized into groups based on the relative sensitivity to pandemic-driven disruption and resulting deterioration in end-market demand. On slide 10 of today's presentation, we show the portfolio groupings with an emphasis on the new Fortive portfolio. As shown on slide 11, the relative performance of these groups largely played out as expected in the quarter. Group one, which represented approximately 20% of new Fortive revenue in Q3, continued to show significant resilience, posting low single-digit growth. The group's performance, again, reflected a solid contribution from the software businesses, highlighted by high single-digit growth at Intellex, which is seeing continued robust growth in North America and is benefiting from the successful execution of the company's expansion into Western Europe. Elsewhere, Census posted low single-digit growth, underpinned by the momentum of its SaaS offerings. Accruant also benefited from the resilience of its SaaS business, which increased slightly in the quarter, with continued growth in annual recurring revenue based on improving churn and increased net retention. Fluke Industrial Imaging had another strong quarter, although its growth moderated as some of the initial COVID-related demand began to level off. Gordian saw slowing in project work among state and local governments and higher education customers, leading to a low single-digit decline for the quarter. Meanwhile, despite continued strong order flow, EMC registered a mid-teens decline due to certain COVID-related supply chain issues and some customer delays. Group 2, which represented approximately 32% of new forward of revenue in Q3, recorded a low single-digit decline. ISC's INET subscription business posted a high single-digit growth, while Fluke Health Solutions showed mid-single-digit growth, driven by ventilator tester tailwinds and support from Landauer's high recurring revenue business model. ASP reported a mid-single-digit decline, due to a mid-single-digit decline in North America and pressure in Japan, which saw a resurgence of COVID cases and an associated reduction in elective procedures. However, we are very pleased to see this partially offset by strong growth in both China and Western Europe in the quarter. We now estimate that elective procedures in the U.S. are back to approximately 90% of pre-COVID levels and are back to approximately 95% in both China and Europe. Group 3, which represented approximately 12% of new four-driven Q3, saw a high single-digit decline in the quarter. While the sensing portfolio declined by mid-single digits, this represented sequential improvement versus the second quarter. Semiconductors and electronics continue to be a bright spot for sensing, which also benefited from COVID-related tailwinds in medical and markets. Elsewhere in Group 3, accruance professional services and licenses business lines saw an ongoing negative impact from continued delays in accessing customer sites. Group 4, which represented approximately 36% of new forward of Q3 revenue, declined by a high single digit of the quarter, but saw a meaningful sequential improvement and performed ahead of our forecast. Both Fluke Industrial and the Tektronix Instruments business saw broad-based sequential improvement. Fluke Industrial decreased by low single digits, paced by Fluke Calibration, which registered mid-single-digit growth. The performance of the Tektronix Instruments business was highlighted by Keithley, which recorded mid-single-digit year-over-year growth. The business also saw improved order activity as the quarter progressed, including initial orders for the new six- and eight-channel versions of the six-series oscilloscope. While we are encouraged by what we saw at both Fluke Industrial and the Tektronix Instruments business in the third quarter, we remain watchful of key macro trends as we continue to work our way toward a return to year-over-year growth in both businesses. Since the end of the second quarter, we have continued to reduce our net debt with our strong free cash flow and the proceeds received from the volunteer separation. including the recent proceeds from Vontir, our net debt is now approximately $2.8 billion, down from over $5.1 billion at the end of 2019. As we look ahead, we expect to continue to generate solid free cash flow, which will enable us to reduce our net debt further. We also expect to monetize our remaining 19.9% stake in Vontir in a tax-efficient manner, with timing subject to market conditions. While Q3 saw a continuation of the better operating performance that started as the economic lockdowns lifted back in the spring, we remain watchful of macro conditions in light of the continued fight against the COVID-19 pandemic. In Q4, we expect the total revenue will increase 0% to 3% on a year-over-year basis. We also expect to deliver incremental margins of approximately 35%. Finally, we are planning to execute approximately $30 million of strategic productivity initiatives before the end of the year in line with our prior expectation that some of the temporary actions we executed early in the year would be made permanent as we turn the corner into 2021. Now that the volunteer spinoff is complete, on slide 12 of the presentation, you will see that we have organized the portfolio into three segments, which we will provide the basis for our financial reporting going forward. The resegmentation highlights the strong positions we have assembled to provide essential technologies for connected workflow solutions across a range of attractive end markets. This view also helps to frame how we think about our portfolio from the perspective of both organic and inorganic opportunities. Details on the segments are as follows. The Intelligent Operating Solutions segment includes Fluke, Industrial Scientific, Intellex, Accurrent, and Gordian, and represents approximately 40% of new forward of total revenue. This segment provides solutions to accelerate field and facility safety, reliability, and productivity, as well as operating intelligence to a range of end users and addresses a total available market of greater than $15 billion. Precision technology segment includes Tektronix, Pacific Scientific EMC, and the sensing businesses, which will now also include Qualtrol and represent approximately 35% of new forward of total revenue. This segment provides mission-critical technologies that enable our customers to accelerate the development of innovative products and solutions and addresses a total available market of greater than $10 billion. The Advanced Healthcare Solutions segment includes advanced sterilization products, fluke health solutions, census, and Invitech, and represents approximately 25% of new forwarded total revenue. This segment provides solutions that enhance patient safety, prevent hospital infections, deliver operating efficiencies, and accelerate healthcare system innovation and addresses a total available market of greater than $5 billion. Importantly, we will report on this basis from the fourth quarter onward and plan to issue supplemental financial information in the coming weeks that aligns with this resegmented view of the portfolio so that you can rebase your models. Before we wrap up, I want to quickly express my appreciation to the Fordham and Von Tier teams for their continued effort and strong execution in 2020. This has undoubtedly been an extremely difficult year, but our performance in the third quarter highlighted once again how our team continues to rise and meet the challenge. With the strong support of FBS, we managed to complete our final preparations for the spinoff of Vontir while also navigating the challenging macro environment to deliver improved top-line performance and another quarter of strong free cash flow. While we face an uncertain environment in the near term, we will continue to benefit from the increasingly resilient portfolio that we have established through our efforts to continue to transform the portfolio over the last four years. With our consistent free cash flow, strong M&A pipeline, and an expanding set of organic innovation capabilities, we are well positioned to capitalize on the many opportunities ahead of us. With that, I'd like to turn it over to Griffin.