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.

Thanks, Jim. That concludes our formal comments. Erica, we're now ready for questions.

To ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. We do ask that you limit yourself to one question and one follow-up question. Please hold while we compile the Q&A roster. Your first question is from Jeff Sprague with Vertical Research.

Good evening, Jeff. Hey, Jeff, we're having a tough time hearing you.

Is that any better? Yes. Sorry about that. Can you just help triangulate us on full-year free cash flow for Fortive Remain Co., kind of what our starting base is, and whether or not there's anything really unusual on working capital or other items that would kind of hinder our ability to grow off that base?

Thanks, Jeff. As you probably noted, it's another strong quarter in Q3 for both companies. I think for both Vontir and Forty. Simple answer is no. I don't think there's anything that will hinder us, you know, going forward. It's been pretty strong year to date. I think the combined companies' free cash flow, I know they're up about 48%, but I And I think the split going forward, if you think of us of a trailing, you know, the year-to-date of trailing 12 is about a 60-40 split here. And I think that's probably a good proxy going forward.

So roughly 60% of what we saw year-to-date we can attribute to the remain count.

Yes, is the answer. I'm trying to say there's obviously some things that are improving throughout the year, but then they'll be offsetting some of the deal cost and headwinds associated with the separation cost. So that's a pretty good number to use.

And then just on the productivity and restructuring actions, are those actually restructuring charges per se, or is this just a – you know, kind of more operational move against some costs to make permanent some of the actions you've taken earlier in the year?

These will be called out as separate restructuring when we report Q4.

And, Jeff, I would think of those as really in two buckets. One would be the I think what we've done is we've done an incredible job this year on digital transformation, allowing us to do a number of things. So a part of that will be sort of leases and a reconfiguration of our sort of real estate footprint around the world, and then the rest of it is sort of what I would say are cost actions that we're taking around the portfolio where we think things may not necessarily come back faster or in places where we want to make sure we're protecting investments for next year.

Great. Thanks. I'll pass it on.

Thanks, Jeff.

Thanks, Jeff. Your next question in queue is from Josh Pogorosinski with Morgan Stanley.

Hi. Good evening, guys. Hey, Josh. So just a couple questions. I guess first just on the pace of near-term activity. You know, obviously buckets three and four are still under some pressure here. We've seen a lot of, you know, short-cycle industrial projects markets start to improve a decent amount sequentially, obviously some of that here as well. But how important is just kind of flipping the calendar in terms of resetting budgets or thinking about inventory positions, just trying to think about, you know, what gets these things kind of back on the map versus where we are today?

Yeah, well... Well, first of all, I'll maybe take one note that you made. I think we feel from a standpoint of where we have channel inventory, and that's probably in the three big places would be Fluke, Tektronix, and to some extent ASP, we feel good about channel inventories and where those are at. So we don't think we necessarily will see any issues relative to, you know, inventory in the channel that could be a hindrance to growing through the remaining part of the year and into next year. So that's maybe a small part of it. I think we're continuing to look at three things to really drive the business sequentially here through the year and certainly into next year, Josh. They really fall into this bucket. Certainly, as you pointed out, short cycle, some improvements in PMI, some improvements in industrial production. To see those continue and maybe to be a little bit more broad-based globally. Secondly, elective procedures. We've seen some nice improvement from Q2 to Q3. When does that continue to improve? I think right now we don't have a belief necessarily that those numbers that I quoted in the prepared remarks necessarily change too much in the short run, but we're certainly watching that, particularly around the world, to see how those go. And then I would say the third thing is how much of return to work, what shutdowns occur, those kinds of things, that has some impact really on how we get onto customer sites to do things, whether it be on some of our software businesses where we're doing... We're doing service businesses on-site. Some of that has been slowed. Some of the customer decision-making has been slowed. So I think we're looking to some of those things to see if those start to improve. So I think those are the three big things we're probably continuing to keep an eye on. We think the business will, you know, continue to sequentially improve, but I think, you know, the inflection point, the big inflection point really happened from Q2 to Q3.

Got it. That's helpful. And then just shifting more strategically now that in the volunteer separations behind you can start thinking about future M&A with a reloaded balance sheet. I guess just with the new segmentation, the segment that sticks out on a pro forma basis looks like precision technologies. I mean, I think in the other two, this whole workflow solutions portfolio thesis seems to come through in the various piece parts. Maybe not as much in that piece. how should we think about that in terms of M&A priorities? Would it be to kind of shore up some more of that end-to-end solution in that piece of the business or to continue building on the other two where you already have some good momentum going?

Yeah, well, I think we could, you know, obviously we like the momentum we've created in the two. So I have every intention of maintaining that momentum as you highlighted. I think as we think about precision technologies today, You know, we really certainly see Tektronix and what they do in a workflow around product development and innovation, and we see a number of vectors and opportunities. I think the team did a wonderful job this year in their strategic plan really highlighting some of those opportunities. So we're certainly looking in that way. And then we think about sensing, and we really have a broad view of, you know, Really, maybe not necessarily a huge workflow, but we can play differently in the workflow, whether it be with IoT-enabled sensors, whether it be maybe a little bit bigger part of the solution, like in Anderson-Negla, where we now have a digital recorder that can really do more of the verification work. So we're certainly seeing a slightly bigger solution that we can play in. in sensing tech, and I think that's where the opportunities will be. And then, obviously, I think tech does play in a workflow that's pretty well defined. So I think we really believe that when we look out, and you obviously heard, you know, the numbers in terms of total available market space, we really think there's a number of opportunities for us to continue to work on the, you know, quite frankly, the places where we're at today and just expand upon them, both inorganically but also organically.

Perfect. Thanks for the call. Thanks, Josh.

Your next question is from Scott Davis with Emilius Research.

Good evening, guys. Good evening, Scott. Seem to have snapped back pretty quickly. It's nice to see. So good work there. But I don't know if you want to take a stab at this, Jim, but do you think Fluke Industrial has a chance of actually crossing into positive territory in 4Q?

Well, there is a little bit of ways to get to there, but certainly we like the trends. We announced a few product launches that are going to be part of Q4. We now have a thermometer that has a clinical nature to it, which we've got an EAU on. So I think that we've got a new imager out. So I think when we look at Fluke Industrial, You know, we had a great quarter in China as an example where I would say the market is pretty good, and we've just done a better job of taking advantage of that market. I'd like to see the markets continue to improve in places like the U.S. I think fluke industrial has a good shot in the U.S. Europe may be a little bit more mixed, and high-growth markets may be a little bit more mixed. So I think overall fluke industrial is going to continue to improve. I think the U.S. will look good, Scott. I think maybe some of the other markets around the world, non-China markets, I think there's still some questions about what the macro is going to look like in some of those parts of the world between now and the end of the year.

That makes sense. And now that we're on the topic of China, do you have a sense, Jim, whether the recovery there is still accelerating or did we snap back and now we're at kind of a plateau and so the rest of the world really has to contribute for us to take another step up?

Yeah, you know, we had a really, you know, new Ford have had a very good quarter. You know, as we said, you know, double-digit growth in ASP and sensing was almost 20%, I think. Fluke, obviously, double-digit. So, you know, that's pretty broad-based from healthcare to industrial to OEMs. I suspect, Scott, that a little bit of that was the snapback from maybe what happened in the first part of the year. But we still see growth there, and I think... I think the world, you know, whether the next level of growth comes, they're obviously stimulating that economy. I think what we're continuing to watch is, you know, obviously if other parts of the world stimulate their economies, that maybe provides some impetus to catch up. But I think China probably still leads the pack here through the remaining part of the year.

Okay, really helpful. Thanks. Good luck, guys.

Yeah, thanks, Scott.

Your next question is from Julian Mitchell with Barclays.

Hi, good evening. Good evening, Julian. Maybe a first question on the margin outlook. So you guide on slide... 14 for that 35% incremental. Just wondered if that's a good placeholder looking out beyond the fourth quarter. You are doing some cost-out measures in Q4. Wondered if you could frame how large the opportunity is for cost reduction with a sort of simpler portfolio without Vontir. today, and any major puts and takes on temporary cost reversals or big fixed cost out next year?

So, Julian, I think we think of it this way. First of all, you know, we're a long way from guiding the top line, which is the biggest number here in Q2. What we're trying to signal is the 35% incremental margins is how we're going to run the business. Of course, assuming we move into positive territory next year, that will come back at better than 35% margins. But we've got some headwinds of the temporary costs that will snap back in as well. And these productivity initiatives that we've put in place we think gives us the latitude under a number of scenarios to manage to the 35%. incremental margins. You know, the last piece of the equation will be, depending on what the top line does, we'll also be pacing our reinvestment back into the business. But we like the 35% because it lets you know, you know, this is what we're trying to manage the business to.

Thanks. And then maybe a follow-up just on the M&A appetite today. I think you called out that $2.8 billion of sort of real-time leverage. So maybe help us understand how quickly you want to get to work on acquisitions and just clarify the extent to which that's contingent on monetizing the 20% volunteer stake.

Yeah, Julian, I think it's Jim. I think really we think we've always, we've tried to not really ever slow down our effort. I think we've tried to remain disciplined and We said at the beginning of the year that we would probably be mostly a bolt-on kind of this pre-COVID, be a bolt-on kind of year. We obviously haven't announced anything. But I think we've been busy through the year. We've looked at a number of things. I think we've remained disciplined in that regard. I think our appetite to continue to accelerate the businesses through M&A is always something we're trying to do. I think we're very comfortable with the funnels that we've created. I think the new segment structure will help us understand and articulate really a vision for each one of those segments, that I think is exciting for companies that are interested in maybe selling themselves. So I think we're in a very good place relative to where we're at strategically from an M&A execution standpoint in terms of readiness. And obviously the balance sheet is in much better shape in order to give us these opportunities. And we'll be in continued good shape given where we're at, as we mentioned in the prepared remarks. not only with the continued free cash flow, but obviously with the opportunity with the volunteer stake as well. So I think we're in a very good position right now for M&A as we look into the fourth quarter and into 2021.

Great. Thank you.

Your next question is from Steve Tusa with J.P. Morgan. Hey, Steve.

Hey, guys. How's it going? Good. Just on your software businesses, do you have kind of a look into, A, kind of how big, you know, just those standalone software businesses are now? And then could you give us an idea of what bookings as well as, you know, retention rate is and how those were kind of trending? Yeah.

So, you know, software revenue now is about low teens, so think of it that way. In a number, you know, it's going to vary a little bit quarter to quarter, but low teens is probably the right number. I don't have the bookings number in front of me, Steve, but, you know, if we think about SAS bookings, they were pretty good in the quarter. I would say probably in the range of, mid-single digits probably, and net retention was over 100%. We had our best net retention number of the year through the quarter, so we feel good about net retention. You know, it's a little harder today. If you think about the components of net retention, things like upselling and cross-selling take a little longer in this environment, in a COVID environment. So renewals take a little bit longer. So we're seeing some of these things move out in the funnel. So some bookings will move around a little bit more. The funnel's taking longer to close. But I think that's why we keep such a good eye on that net retention number because it's so important to us. So having a number that's the best of the year and better from a year ago, you know, and certainly better than a year ago, is just, I think, a testament to how we've used the Florida business system around the various components of software business to continue to make sure that we're driving the business, even in a really, you know, obviously in a challenging environment. And then what was total revenue growth for that bucket of revenues? I think we were roughly, for all the software businesses all up, we were roughly flattish, and the SaaS businesses were mid-single digit. Okay. So what happens is the SaaS parts are mid-single digit. What's the more challenging part is the on-site services, professional services. That's the part of the business right now that's lagging, and, you know, that's just a situation of, You know, it's just harder to get on site to do some of this. We've done a great – we're significantly better than we were in Q2 because of a number of the remote site work that we've developed in order to be able to do, you know, remote turn on. But we need to continue to do that. And then just taking longer with some customers.

And what's the split of that revenue between, like, you know, what you would consider to be kind of recurring and the more transactional?

Steve, I think it's two-thirds, one-third roughly. Two-thirds fast.

Right. So the two-thirds up kind of, you know, low to mid-singles, and then the stuff that's not recurring, you know, down given the environment.

Yeah, I mean, in some of the businesses, you know, obviously we vary from business to business. As we call down the prepared remarks, we've got some businesses that, you know, that are able to kind of push through that because their amount of on-site support is less, that we turn on faster, that kind of thing. Accruant is a business where we have a little bit more service than, you know, professional services and managed services than we do, and maybe some of the other software businesses as an example. Got it.

And one last one. On those kind of more transactional stuff, what is the impact on margin? Is the recurring stuff higher margin or – is the episodic stuff, higher margin.

I'm trying to read through some of these software reports. Yeah, almost without exception, the SaaS businesses are higher margin. Okay, great. Thank you. Thank you.

Your next question is from Andrew Obin with Bank of America.

Hi, guys. Good afternoon. Good evening, Andrew. Just a question. It's a COVID question. And just thinking about, A, your commentary about elective surgery and also sort of getting site access in software. How are you seeing sort of, you know, these businesses developing, given that we sort of have more news flow about rising COVID cases into the fourth quarter? What kind of visibility do you have? And maybe you can give us... some color on the trends in October for both. Thank you.

Yeah. So on elective surgeries, the numbers we highlighted in the prepared remarks are about what we saw in October. So I don't think much difference. And quite frankly, we're not planning for those numbers to improve. So we don't need necessarily an improvement in in things. And I do think relative to hospitals, as we've talked to large major hospital chains, particularly in the U.S., customers, I think they're much better prepared now for COVID in order to maintain procedures, whereas at the beginning of all this, they obviously weren't as prepared. So I think the hospital network today is much more prepared to continue to do elective procedures with the increase in COVID cases than they were in the second quarter. So we feel pretty good about the number we have. Obviously, it's impossible to predict the pandemic and that kind of thing. We're not going to get into that position. But I think we feel like we understand that, and we certainly have other scenarios. But I think our scenario that we have going forward is for that not to necessarily improve the remaining part of the year. Relative to getting on site, Relative to getting on-site for customers, I think we're in a mode of not expecting any more on-site. Really what we're trying to deal with is really we've assumed for you know, pretty much since the middle of the summer, that our customer set was just gonna continue to be, take longer, so our offerings had to be more digital-oriented. We had to move our services organization to try to do more remote on-site support, and we continue to do that. We have no expectation necessarily of needing people to get back to work anytime soon in order to sort of fulfill where we think things are at, and that's maybe the uncertainty that continues to remain But, you know, we'd love to see people getting back into some things that are normal, but we don't suspect that is between now and the end of the year.

Well, it's good to hear. It's not good to hear, but it's good to hear in regards to your guidance. And just a follow-up question on Tektronix. Could you give some color by vertical in Tektronix, you know, federal semis? What are you guys seeing there? Thank you.

Yeah, in the quarter we had good auto. We had good semi. We had good mil-gov. I think mil-govs continue to be pretty good. And we saw what we would call consumer electronics was pretty good as well. So those sectors were pretty good. I would say sort of general industrial was probably the place where we saw maybe things not as good. But certainly, you know, really semiconductor was really driven at Keithley. The Keithley comment we made in the prepared remarks was really driven by semis. So I would say auto, semiconductor, and mil-gov were the three segments that we saw positive growth in the quarter.

Good to hear. Thank you so much.

Thanks.

Your next question is from Andy Tablowitz with Citigroup.

Hey, good afternoon, guys. Hi, Andy. Hi, Andy. Hi. Jim, how much of the slowdown that you saw, Gordian, do you think is those temporary access issues that you talked about versus the pressure that you say from state and local governments? And would you expect to see Group 1 that you talked about stay around that low single-digit growth moving forward, at least for the next few quarters?

Yeah, there's a couple of drivers that would have helped Group 1. One is, as we noted, our EMC business, which has just a tremendous backlog of and has done a great job of securing new business, has really had some supply chain challenges driven by COVID, and some customer acceptance issues. In terms of having customers come on site to approve things has been a challenge. So I think if they had had an even normal quarter, if you will, probably would have boosted that group a couple of percentage points, probably a couple of basis points. Relative to Gordian, you know, I think we continue to think that it's probably a two-thirds, one-third issue relative to two-thirds on-site challenged, one-third state and local government education budget kind of situation. I think we, obviously those budgets are challenged, but in many cases, as you know, Andy, we don't play in the new construction aspects or the new building kind of part of this. This is really the renovation aspect and operations part of facilities management. So we feel that that's going to continue as we start to get some, you know, facilities still need to get some of these things done. So there'll be some pressure in that for sure. So we're not suggesting that that's perfect, but it is better. We really do start our job order contracting business, but generally with an onsite assessment. So I think that's a couple of quarters probably of challenges. We continue to see where the pandemic goes. We were really pleased with our RS Means online business, which was up, I think, high single digits in the quarter. So part of the business continues to do well from a customer engagement perspective. But the job order contracting business is the biggest piece. We think it's got some pressure for, you know, our outlook for at least a quarter or two here.

That's helpful, Jim. And then you mentioned to Josh about sort of sensing tech opportunities. One of the big topics that I always get asked about is sort of digital transformation and, you know, what it can mean for companies. Are you seeing evidence because of COVID itself for the need for more sort of automation, software in general, more conversations around some of your products that could drive growth as you go into 21 and beyond?

Yeah, I think, you know, a lot of what we've done in sensing tech around digital transformation has actually been on the innovation side. They've been one of the great users, if you will, or participants in a number of our growth accelerator innovation projects. I mentioned Anderson-Negla has a digital process recorder. That is all about workflow validation and then playing a bigger role in the digital world for their customers. And so that's a good example. had a play with COVID of their airborne in negative pressure situations they have a they have an infection monitor if you will or air monitor that they've been able to put into workflow all around COVID but it's also you know it digitally helps these isolation rooms understand where they're at so I think our sensor businesses through the efforts they've had over a couple years of a broadening the work they want to do not just be a sensor but a little bit more of a solution, that's been work we've done for a couple years. And I would say that that's starting to accelerate. Still small numbers, though. I think if we were to look at what those numbers look like, I think it's probably we would start to see the benefit of that with some scale, you know, probably not until 2022. But we'd like the trajectory that those teams have really been and the traction those teams have really been getting in the last 12 months. Appreciate it, Jim. Thanks, Annie.

Your next question is from Richard Eastman with Baird.

Yes, good afternoon. Thanks for the question. Jim, could you just speak to ASP for a minute? And when you look at that business and how it performed in the quarter down mid-single digits, what was the composition of that? Were placements, machine or equipment placements, down big and consumables starting to ramp back up? And when does this... you know, patient procedure number start to factor into their business? Can they have an up fourth quarter at ASP?

Yeah, so, you know, there's definitely a story around the world. I think when we look at, you know, as I said, none of the major regions, China, Western Europe, or the U.S., had elective procedures back to 100%. And yet we had strong growth in China and Western Europe. Western Europe has had a good capital opportunity, so they've seen more capital placements during a time when maybe consumables were actually not growing as much, but capital's made up for it. China, a little bit of the same story. We haven't seen as much of that in the U.S., and so we see naturally that the U.S. is a little bit maybe farther behind in that regard. But I think we feel good. We had a good full year. You know, our biological indicator business was very good around the world. You know, that's a part of the business that's fairly sizable. Obviously, terminal sterilization is the biggest piece. And it's really, at this point, I think, going to be more a North American return. We think we can continue. We've seen some nice placements here recently. But they have a bigger part of their business is services and consumables. So I think we still need to see that sort of come back. I'm not necessarily predicting that this year, but I think in 2021, you know, we'll start to see some of that improvement and some of the impact of some of those things, the placements that we've seen here recently. So we feel good about the business. We've done a number of things to get the business on track, as you well know. And, you know, I think it's on a good trajectory at this point.

And you referenced ASP when you spoke to the channel around Fluke and Tektronix. Is the channel and any inventory that might be in the channel, is that around consumables or is that around the equipment?

It's around consumables. And it's not a big number like Fluke and Tekt. It's not, you know, Fluke and Tekt, as we know, is, you know, 40%, 50%, 60% of revenue is in distribution. It's not that number. But there is some aspect of channel inventory. That's why I referenced it.

And just maybe a bigger picture as well, when you think about the equipment and instrument placements versus maybe the 30% of NUCO afforded that's recurring or services, how did the overall instrument placement or equipment placements look in the third quarter relative to that consumable number or recurring number?

Yeah, so one is I think New Florida is going to be approaching almost 40% in total recurring revenue. So just so you have that number, it's just shy of 40% at this point. So I think every quarter moves a little bit. I don't have the numbers handy, but I would say in general we tend to think of the recurring revenue part of that business as about 80%. of total versus capital, and within that 80 is consumables at probably two-thirds of the 80, and services is maybe a third.

Okay, okay.

And that number doesn't change radically quarter to quarter. So if it does, it really is sort of one particular customer, and I think it's always better to sort of think about that on a year-to-date basis anyway. Okay.

Okay. And just if I could sneak one more in, are you going to lay the SVP structure on top of the new segmentation? Is that the plan to manage?

Yes, we would. Yeah, so we're obviously going to continue to roll out some color around the organization, but you can think of that as an organizational view as well. So as you think about that structure, you can think about it as an organizational view as well.

Okay, very good. Thank you. Thanks again. Thanks, Rick.

Your next question is from John Walsh with Credit Suisse.

Hi, John. Hi there. Good afternoon. Wanted to revisit incrementals on the fourth quarter and just come at the question a little bit differently. I think you guys have outkicked what you were guiding this year there in terms of incrementals. But is there anything from a mix perspective or a you know need to reinvest in any of the product lines just because 35 would be a step down from where you've been the last two quarters just trying to understand the if there's a specific item or we're just a little bit conservative on top line trajectory

I think we had uncertainty, I'd say, coming into the third quarter where the top line would end up, and it did come in better than what we built the cost structure around, and that's what you're seeing about why the incrementals are a little bit better. I think that we're talking about relatively smaller dollars compared to Q2, of course, in terms of the magnitude. But in Q4, some of those expenses will come back into our expense base as the top line recovers. But we're also trying to balance what we're seeing to deliver that 35% margin, but also, you know, and continuing to invest as much as possible to spur growth and future success for our customers and our, you know, and our businesses.

Got you. No, that makes sense. And then I guess just a mechanical question here around the remaining monetization of Vontir. You know, as you monetize that, will there be, you know, any kind of announcements triggered as you monetize that position? And then maybe how do we think about kind of the tax implications as you do that? I'm not sure kind of if you have a dollar cost basis in the stock at, you know, when it's split off or if there's anything we need to think about as you monetize. the remaining 20%?

Well, with the remaining 20%, as it sets up right now, assuming we do it in the next 12 months in our base case or sooner, we don't really have any tax implications there. It's set up as a tax-free spend. I think the or tax-free transaction. I think that the timing is what we need to do is we need to spend the company, we need to have these earning calls, file these queues. We want to get to the other side of the election, and then we're going to let market dynamics dictate, you know, what the right timing is. And we'll be up front about that. But we need to probably get another month, probably get well past the election, I would guess, at least. But I'd like to get it, you know, hope to get it done the first half of next year or sooner.

Okay, thank you. Take care. Thanks, John.

Your next question is from Dean Dray with RBC Capital Markets.

Thank you. Good evening, everyone. Good evening, Dean. Hey, I was hoping you could clarify where you stand on addressing stranded costs at RemainCo. I might have missed this, but it did sound like some of that $30 million repositioning had some footprint reductions, which sound like... taking out stranded costs, but if you could just start with that, please.

Yeah. Dean, I wouldn't say that they're really addressing stranded costs per se. I think it's more Jim talked about the digital transformation and the opportunities we've seen, you know, for streamlining some of our operations and also setting us up for next year. You know, we do have a smaller revenue at this point in time, but it's not – It's not related to empty buildings due to the split. It's more on there are some leases and buildings that we're exiting there for sure, but it has more to do with how we see a different way to run these businesses given what we're calling the digital transformation.

Got it. And are there any shared services with Vontare that will be in existence, and if so, for how long?

There's very few. Most of them completed before the end of this year. There's a few, as there were when we separated from Danaher, most notably around the tax agreements where we have to file taxes from. You just can't get away from that for a long period of time. But I'd say minimal beyond the next two months. I think Dave and Mark have done a tremendous job building their organization.

Excellent. Just a last one. When you were rattling off some of the quarter dynamics that I hear at Pax IMC, there were some supplier issues. Was that company specific or is there any systemic issue, a product shortage or anything like that?

Yeah, no, I think we've dealt with, you know, we had some supply chain issues, I think, that, you know, a lot of people talked about in Q2, Dean. We mitigated and really did a great job. The supply chain team is really proud of the work they did in the quarter. Particularly, as you know, we continue to guide revenue up through the quarter. So we continue to see revenue coming in, you know, higher as we move through the quarter. And yet our on-time delivery metrics were good. Our our past due backlog. So it's really an issue that's very specific to really a couple of suppliers who had challenges in their own factories with COVID and with, as I said, the customer onsite work, which is just tougher to communicate and sort of coordinate, if you will, with a bunch of customers in a business where you need onsite approval before you ship to a customer.

Got it.

Much appreciated. Thank you. Thanks, Dean. Have a great night.

You too.

Your next question is from John Inch with Gordon Haskett.

Thanks very much. Hi, everyone. Quick question on tax. Hi, guys. You guys have one of the lowest tax rates amongst multi-companies, and I believe when you bought ASP, you did some tax structure reorganization favorably to shareholder benefit. I'm wondering if you guys have any preliminary thoughts on the proposed Democrat tax plan I think they obviously clearly want to raise corporate taxes for everybody, but I think they've talked about going after guilty taxes and other aspects of this as well. I'm just curious if there are other levers, prospectively, that you could pull to kind of keep things as favorable as they've been in the past.

Thanks, John. Well, I think we're watching a number of things, and there are different scenarios and things that we can do that are potential countermeasures. But before we start thinking about will they be able to offset any taxes that may or may not happen, we need to see exactly what they're going to change and what the timing is. And then remember, overlay it with what's happening in the rest of the world. We've got you know, not quite half of our income and revenue outside there. And they're changing their taxes, too. So we have to see how all that plays. It will be well into next year before we'll really be able to have an opinion there about what it will actually do.

Okay. No, that's fair. Thanks, Chuck. And then just as a quick follow-up, you know, I find it actually interesting, if not even ironic, that health care now has become a reporting segment or platform for which clearly wasn't the plan envisioned when industrial Ford was spun out of, call it healthcare Danaher, right? And so my question is, do you see healthcare opportunities, Jim, in today's market with valuations pretty high? Do you see these opportunities being able to sort of expand this platform to become even something that is much bigger than perhaps we even envision today? Yeah, and I guess also part of your question is, boy, you got ASP at quite the value.

But I think at the end of the day, you know, we've now built a billion-dollar platform in healthcare. And as you said, I think we have a very good position. You know, our position is really in the workflow we're really talking about is really, in many respects, hospital enablement. It's about helping hospitals be more innovative, help them drive efficiencies, deal with patient safety. And I think there's a number of opportunities. We've got a wonderful amount of work that we've done around that workflow. We think the current businesses we have today have opportunities to And we do think we have a number of opportunities. I think, you know, we bought census last year. It's our most recent acquisition, which has been a very good deal for us. And again, I think, you know, we'd continue to see at a good value. So I think we've been able to find opportunities. It's really about what we can do with them now. I think now with a scalable billion-dollar platform, two years ago, three years ago, four years ago, we didn't have necessarily that platform in which to build on, which you can generally get faster returns in some cases because you now have bolt-on opportunities. The mix of capital allocation can be a mix of opportunities. maybe longer-term returns and some value creation opportunities. And I think now more than ever we have that opportunity, John. So I think we're really excited about the work that we've done there, and we're excited that we're pushing through and got ASP into the family. In the time frame we said it would be a lot of work to get there, but I think now we have a launch pad in which to build off of. Yeah, and to your point, Jim, hospitals clearly need the help, right? So thanks again. Appreciate it. Yeah, that challenge isn't going away.

Your next question is from Joe Giordano with Cowan.

Hey, guys. Thanks for squeezing me in. Thanks, Joe. Sure, Joe. Just on the healthcare side again, Jim, I appreciate the comments earlier that hospitals are better prepared now to deal with rising cases than last time. How far are we in terms of patient load now versus where we were when things started to shut down? And how far above that level do you think it can get before that becomes an issue? And how are you guys thinking about European business now with France talking about 30-day lockdowns and things like that?

Yeah, so I think, you know, I think first I'll take the – I'm not sure we would necessarily – you know, we got into – in North America, I think in Q2, we were in the 75-percentage load at its low point. That's probably a good number to sort of work from. And I think where we're at today – you know, you never know. There's certainly ambiguity in every one of these comments. But I think we believe that just because of our own on-site work in the last few months, that the hospitals are much better prepared for what could potentially happen with caseloads going up. And obviously the financial situation in which elective procedures are a tremendous funding mechanism for hospitals, there's a financial ramification to that. you know, getting rid of elective procedures. So, you know, I think we feel that the numbers we quoted a few times on the call today, you know, that 90, sort of 90th percent range in the U.S., you know, I think that's where we think the rest of the remaining part of the year will be. And then let's see what the trend line looks like for 2021. I wouldn't begin to start to predict what those numbers would look like for next year. Western Europe, let's see. One country is not going to make a big, a huge difference. We would need to see you know, that pretty broad base. Let's see where that goes. And, again, I think sterilizations continue. You know, the good thing about this is that sterilization, you know, there are a lot of elective procedures. There's still a lot of procedures that go on that are not elective as part of the business. So, you know, surgeries still happen. A lot of procedures have to happen because they're emergency related. So, as I said, I think let's see where that goes. For sure we're prepared for a variety of scenarios. Thanks, guys. I think we're going to have to call it there. Apologize for if we didn't get to you. Certainly Griffin and Ross are available for follow-up conversations if we didn't get to you or for anything that is needed. We obviously want to thank everyone. I want to thank everyone for it's hard to believe that 2020 is three quarters or really ten months now finished. It's been a tough year for everyone. I know I'm including everyone on this call. We appreciate all the support. We're incredibly excited about where we're at. We're excited for everything that we have going, the new segmentation. Hopefully you see the excitement that we have in our voices as we move forward with New Fortive, and we know the volunteer team is going to do an outstanding job. They'll be on the phone on Thursday, and I know they're going to do a great job. Best of luck to them as well, to our friends over there. Mark and Dave are going to be great. Thanks, everybody. Have a great evening. We'll talk to you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.