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spk01: My name is Alexander, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortib Corporation's third quarter 2021 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 a 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.
spk15: Thank you, Alexander. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Leeko, 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.4div.com, under the heading Investors Quarterly Results. We completed the separation of our prior Industrial Technologies segment through the spinoff of Vontir Corporation on October 9, 2020, and have accordingly included the results of the Industrial Technologies segment as discontinued operations. 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, 2020. 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.
spk10: Early in the third quarter, Ford have celebrated its fifth anniversary as an independent public company. This quarter, we continue to demonstrate the success of the strategy we outlined in 2016 to enhance growth and margins across our businesses through the successful execution of the Ford of business system, the acceleration of innovation, and the impact of disciplined capital allocation. Our third quarter results were highlighted by 32% growth in adjusted earnings per share. We continued to generate significant revenue momentum throughout the quarter, realizing 9.1% core revenue growth and order growth of just over 20% against a backdrop of strong broad-based demand. Strong execution and application of FBS helped to generate 325 basis points of core operating margin expansion, along with very strong free cash flow, despite widespread supply chain disruption. In the third quarter, our software businesses grew by low double digits, supported by strong demand and improving net dollar retention. In total, we now have almost $750 million of annualized software revenue across the portfolio with double-digit organic growth profile, as well as a high share of recurring revenue and high operating margins. In August, we closed the acquisition of Service Channel, adding another differentiated high-growth software asset to our intelligent operating solution segment. The service channel acquisition significantly enhances our strategic position in the facility and asset lifecycle market, extending our leading suite of offerings for facility owners and operators, and providing a variety of potential avenues to deliver unique, value-added solutions in combination with Gordian and Accurrent. As you can see on slide four, across Fortiv, we continue to invest in product development to drive organic growth and enhance our competitive position. Many of our investments in organic innovation are focused on enabling digital transformation across our customer base. This includes vertically tailored software offerings at Tektronix and Fluke Health, emerging IoT solutions and sensing, as well as early progress with new tools for improved workforce management at TeamSense. In addition, our investments in the fort continue to drive data analytics and machine learning opportunities across all of our businesses. Our success in accelerating the pace of innovation across our portfolio is demonstrated by examples such as the Fluke ii900, a groundbreaking product which was recently recognized as Test, Measurement, and Inspection Product of the Year at the 2021 Electronics Industry Awards. We continue to build the strength of our talent base to accelerate progress across Florida. This quarter, we announced a number of important additions and promotions to the senior leadership team, including the appointment of Elumide Shiroya as president and CEO of Intelligent Operating Solutions, the promotion of Tammy Newcomb to president and CEO of Precision Technologies, and the promotions of Justin McElhaden and Bill Pollack to group president roles within IOS. These moves highlight how we are building leadership capacity through a combination of internal development and external hires aimed at adding differentiated skill sets and experiences to our senior team. With Illumidae and Tammy, as well as Pat Murphy now leading advanced healthcare solutions, we have significantly increased the depth of our leadership within all three of our segments. Turning to a quick summary of the results in the quarter on slide five. We generated year-over-year total revenue growth of 12%, core growth of 9.1%, and orders growth of just over 20%, with backlog increasing by 40% year-over-year. Adjusted operating margin was 22.8%, while adjusted earnings per share was 66 cents, representing a year-over-year increase of 32%. The strong adjusted operating margin performance helped us to deliver $252 million of free cash flow, which represented 105% conversion of adjusted net earnings. On slide six, we take a closer look at the intelligent operating solution segment. iOS posted total revenue growth of 16.6% in the third quarter, with core growth of 13.1%. This included low teens growth in North America, high teens growth in Western Europe, and mid-single-digit growth in China. Fluke's core revenue increased by mid-teens with very strong demand trends continuing across its end markets and major geographies. Fluke's performance was highlighted by high teens' revenue growth at Fluke Industrial, which also generated order growth of greater than 20%. Fluke's industrial imaging business continues to perform well, paced by momentum from innovation across its acoustic imaging product line, which doubled year over year in the third quarter. Fluke Networks had a very strong quarter driven by innovations such as its LinkIQ product line. Fluke's efforts to expand its recurring revenue base saw further progress in Q3, including strong performance across both its service offerings and its eMate, which generated high teams growth in revenue and fast bookings for the quarter. The combination of robust order growth and supply chain constraints in Q3 led to strong backlog that we're carrying into the fourth quarter and 2022. Industrial scientific revenue increased by mid-teens as its instruments and rental business continued their strong recovery. The ISC team has done an excellent job using FBS tools to accelerate product redesign initiatives, which have helped alleviate component supply challenges and limit impact on delivery times to customers. Intellects grew by mid-teens and posted another record revenue quarter. Intellect is seeing solid FBS-driven improvements in its upsell process to support higher net dollar retention. Also in Q3, Intellect signed an exclusive partnership deal with Data Moran, which enables Intellect's customers to manage their full lifecycle of their ESG strategy, including materiality analysis and risk identification. The current grew by low single digits in the third quarter, while seeing strong bookings of greater than 20%. This booking strength was paced by continued demand for Accruant's Meridian engineering document management and maintenance connection CMMS offerings. Accruant also continues to see strong demand for its EMS event workspace and resource scheduling solution to support emerging hybrid office models as customers execute their return to work plans. Among the notable new customer wins for the EMS solution in Q3 were several leading global financial services providers. Accruant also continued to see improved performance in its professional services business, which generated low double-digit growth. Gordian increased by mid-teens, with strong growth in procurement and in estimating. In the third quarter, Gordian continued to see increasing project volume, as well as higher average dollars per project. Gordian is also seeing success from its expansion into healthcare, with significant demand for its facility solutions from hospital customers. After completing the acquisition of Service Channel at the end of August, we are obviously early in our ownership, but we're very pleased with what we've seen thus far and are excited to have them join Fortiv. Specifically, Service Channel continues to demonstrate strong momentum in its large enterprise retail business, with several large customer wins in Q3, including Walgreens, which will roll out automation software across their more than 10,000 locations, and the third largest mobile carrier in North America as they transform their facility management program. Moving to slide seven, the precision technology segment posted a total revenue increase of 8.9% in the third quarter with core growth of 7.7%. This included high single-digit growth in North America and high teens growth in Western Europe. China grew low single digits but saw strong continued momentum in demand with double-digit order growth in the quarter. Tektronix grew high single digits with strong demand trends across its product portfolio and double-digit order growth. Growth was led by the performance of its mainstream oscilloscopes, with a greater than 30% increase supported by new extensions to the 6-series MSO product line. Tektronix continued to see traction from its efforts to expand in data centers and other related wired communications applications, delivering a number of key customer wins, including Lenovo and Ericsson. Throughout the third quarter, Tektronix did an excellent job deploying FBS countermeasures to navigate sustained supply chain challenges while also delivering significant price realization. Even with this strong execution, given the continued robust pace of demand from its customers, Tektronix increased its backlog by more than 70% versus a year ago. sensing technologies increased by low double digits in the third quarter sensing reported strong growth across each of its major regions with robust order momentum across its key end markets cetra registered additional market share gains with its hvac offerings in q3 and continues to generate strong growth across a range of critical environment applications including hospital isolation rooms and pharmaceutical manufacturing Hengstler Dynapar had a very strong quarter by utilizing the FBS toolset to improve lead times and on-time delivery to drive share gains with key OEM customers. Pacific Scientific EMC grew by mid-single digits, including improved momentum across its commercial customer base. PacSci continues to see significant growth opportunities in its aircraft and space end markets, with strong momentum across its critical safety technology offerings. Moving to advanced healthcare solutions on slide eight. Total revenue increased 9.3%, while core revenue increased 4.7%. This included mid-single-digit growth in North America and low single-digit growth in China. Western Europe saw high teens decline based on a difficult prior year comp at Invitec, partially offset by strong growth at ASP and Fluke Health. ASP grew by low single digits in the third quarter, highlighted by a strong capital equipment performance, including low double-digit growth in terminal sterilization capital. ASP continues to benefit from the solid sales execution, driving the consistent expansion of its global install base. Consumables revenue grew by low single digits, led by high single-digit increase across all geographies outside of the United States. In the U.S., the spike in COVID-related hospitalizations led to a notable decline in elective procedure volumes toward the end of the quarter, resulting in global elective procedures at approximately 88% of pre-COVID levels for the period. While we expect only nominal improvement in elective procedure volume in Q4, longer term, we expect ASP's consumable revenue will benefit from procedure volume normalization and growth in its global install base. Census increased in the low 40% range, highlighted by very strong growth in professional services and related hardware. Its census-tracked SaaS offering grew mid-teens as it continued to benefit from new customer additions, as well as good momentum with upselling and cross-selling to existing customers. Census continues to have open access to customer sites and saw strong, sustained order growth throughout the quarter. Fluke Health Solutions increased by high single digits with continued strength in North America and Western Europe, tied to market share gains with OEM customers through the continued deployment of FBS growth tools.
spk17: FHS executed very well from partnership efforts with the Fort, driving lower customer churn at land hours using the Fort's predictive modeling tools. The company continues to see good early traction, from software innovation efforts with 30% growth year over year in Q3.
spk10: Invitek declined by mid-single digits, which was better than expected against a tough prior year comp that included significant COVID-related tailwinds. The company continues to see strong demand across the diagnostics and life science verticals and expects to end the year with significant order momentum and a healthy backlog to carry into 2022. With that, I'll pass it over to Chuck, who will take you through some additional details on our margins, free cash flow, and balance sheet.
spk18: Thanks, Jim, and good afternoon, everyone. We delivered another quarter of strong margin performance in Q3, using FBS tools to deliver strong pricing and successful value engineering to implement component FBS execution, and the continued strength of our software businesses helped deliver adjusted gross margins of 57.3% in Q3. This reflects 90 basis points of expansion on a year-over-year basis as we accelerated to 220 basis points of total price realizations. Q3 adjusted operating profit was including countermeasures enacted in the face of ongoing supply chain challenges. We had strong margin performance across all of our segments, resulting in 325 basis points of core operating margin expansion. On slide 9, you can see that in the third quarter, we generated $252 million of free cash flow, representing 105% conversion of adjusted net income. Free cash flow over the trailing 12 months increased 22% to $991 million. Our current net leverage is approximately 1.6 times, and we expect net leverage to be around 1.3 times at year end, excluding any additional M&A. Turning now to the guide on slide 10. We are raising the low end of our full year 2021 adjusted diluted net EPS guidance to $2.70. resulting in a range of $2.70 to $2.75 for the year. This represents a year-over-year growth of 29% to 32% on a continuing operation basis. This assumes that total revenue growth of 14% to 14.5% adjusted operating profit margins of 23% to 23.5%, and an effective tax rate of approximately 14%. We continue to expect free cash flow conversion to be approximately 105% of adjusted net income for the full year. We are also initiating fourth quarter adjusted diluted net earnings per share guidance of 74 cents to 79 cents, representing year-over-year growth of 6% to 13%. This assumes total revenue growth of 6.5% to 8.5%, adjusted operating profit margin of 23.5% to 24.5%, and an effective tax rate of approximately 15%. The adjusted diluted net earnings per share guidance also excludes approximately $12 million of anticipated investments in strategic productivity initiatives that we expect to execute before the end of the year. For the fourth quarter, we expect free cash flow conversion to be approximately 125% of adjusted net income. With that, I'll pass it back to Jim for some closing remarks. Thanks, Chuck.
spk10: We're very pleased with our performance in Q3. We work diligently to countermeasure supply chain challenges that persisted throughout the quarter and which we expect to continue into 2022. Our teams are doing an excellent job deploying FBS to navigate those headwinds, while also delivering strong margin performance and free cash flow generation. Looking across our end markets, the demand backdrop we're seeing is very strong, with significant momentum in our order flow driving continued growth in our backlog and double-digit growth across our software businesses. While continuing our focus on execution, we're investing in innovation, expanding our base of leadership talent, and pursuing additional capital deployment opportunities as we look to enhance our competitive advantage and pave the way for consistent double-digit earnings and free cash flow growth in the years to come. With that, I'll turn it back to Griffin.
spk15: Thanks, Jim. That concludes our formal comments. Alexander, we are now ready for questions.
spk01: Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. Please limit your question to one and one follow-up question. We have your first question from Scott Davis with Millions Research. Your line is open.
spk14: Good afternoon, guys, and good evening, everybody. Hey, Scott. It's a pretty good quarter overall. I'm just trying to nitpick a little bit. If price up 220 basis points, did that fully offset your cost, Jim? And is price still going up as you go into Q4 here to offset kind of the deltas as costs continue to rise?
spk10: Yeah, Scott, thanks. I think number one is we've been ahead. As you know, we've been in a really good position all year relative to price cost. And, you know, hence our gross margins going up. 90 basis points in the quarter. So yeah, we're ahead. I think one of the things about price is when you think about it, we really think about it in the big hardware businesses as fluke, tech, and sensing. And in those businesses, we were over 300 basis points. So yeah, and we'll see improvement from there in the fourth quarter. So yeah, so we're in good shape. You'll see the price in the software businesses in the net dollar retention. and so net dollar retention at 102 or so with some of our businesses even higher means we're also we're getting that price and a number of the software businesses it just doesn't show up in the metric the way you'd like it but we're i think in a very good shape relative to price cost in the hardware businesses relative to any inflationary pressure we might have okay good and then uh service channel you made some positive comments and what what is it more specifically that you like uh more perhaps today than when you close the deal Well, I think, you know, number one, the team. I think, you know, we didn't have full access to the entire organization when we were in the deal. So, I mean, I think with the work we've done, we've been in person with the team, and I think we're excited about the quality of the organization. That's number one. We always said the product was great, so I don't think there's any surprise there other than the product is great. And the solution is good. And as we articulated in the prepared remarks, the breadth of opportunity is really positive. I would say the other thing is we're really starting to see how we can continue to expand the business and some of the levers that are out there. So we'll do, as you know, we'll do our 100-day plan here in, you know, about a month. And we'll certainly, you know, codify for the remaining months. rest of the year, but more importantly for next year relative to our plans. And right now we're, I think, in a very good place relative to how we see the business.
spk14: Great. I'll pass it on. Thank you, and good luck in 4Q.
spk10: Yeah, thanks, Scott. Good to talk to you.
spk01: We have your next question from Dean Dre with RBC Capital Markets. Your line's open. Thank you. Good afternoon, everyone.
spk07: Good evening, Steve. Hey, just maybe start with fluke. And in most circumstances, something has not gone right if you're building backlog and fluke. My guess is that was a factor with the supply chain issues. Maybe some color there would be helpful.
spk10: Yeah, sure. I think we had a very, very strong quarter at Fluke. As we mentioned, we did build backlog. As you know, any product that has a range of electronic components here is going to be a little bit of a challenge. So, you know, orders were in the high teens, so we're really good shape on the order side. We built backlog, as you mentioned. I've been with the team a couple times on the shop floor, and they're doing some really good work to get on with orders. many of the component challenges they've had. But we're in a very good place with backlog and with the position of the business. I like where we're at, as we mentioned, from an innovation perspective and the prepared remarks, a number of examples of where I think we're really handling things well and we're taking market share. And, of course, all that's also really driving strong margins there as well.
spk07: Okay. And then as a follow-up, I guess you should not be surprised. This is really a page from your playbook to jump on the opportunity to do some discretionary restructuring in the fourth quarter to get a jump start on the coming year. So this $12 million, just to be clear, that was not in your prior guidance. Is that correct?
spk18: That's correct, Dean. We've got some things going on with the ASP Day 2 countries that we plan to get after but hadn't been put into our guide. And then we've also got some things around facilities reductions that we're looking at reducing our footprint.
spk07: Got it. And which segments would benefit from those, from that spending? Yeah, about half of it.
spk10: Half of it's in IOS and the other half's in the other two, almost split evenly between PT and health.
spk07: All right. That's good to see. Thank you.
spk10: All right. Thanks, Dean.
spk01: We have your next question from Jeff Spray with Vertical Research. Your line is open.
spk19: Thank you. Good afternoon, everyone. Hey, Jeff. Interesting answer to the prior question, absorbing that. Also, is there some dilution from service channel in Q4 as you bed that down and Any change of view of kind of that year one accretion, I think, in the four to five cent range?
spk18: So, Jeff, this is Chuck. No change to the year one accretion around that four cent range. And actually, it's coming in just as we expected. But in the fourth quarter, we're going to get revenue with really not a lot of operating profit as it moves into profitability really in next year. So that's not different. And so inherently, there is a little bit of dilution there in Q4.
spk19: Great. Margins look good in spite of that. And then just on this Walgreens deal, was that something in the pipeline already? Or, you know, is there, you know, some synergy that's already occurring with the Gordian or Cruin or some other part of Fortis?
spk10: Jeff, I'd love to take credit for it, but it was in their funnel, and the team did a great job executing on it. So I won't – we'll take credit for when the synergies happen maybe next year. But right now the team is – obviously we saw it in the funnel when we did our due diligence, so we knew. And I think their say-do ratio of things they said they were going to do during due diligence – versus what they've completed during our short time period with them has been really high. That happens to be one of the things that they've executed on extremely well.
spk19: And is the answer to the tech backlog the same as the answer to the fluke backlog, essentially just some supply backing up a little bit?
spk10: Yeah, I mean, it's, you know, we're not the first company to talk about it, what I understand. So I think at the end of the day, electronic components, you know, what we said at the beginning of the quarter was it would be more an availability issue than an inflationary issue. We've seen some inflation for sure, but a lot of that's temporary because we're just – given the demand has continued to accelerate, it's a good news story here. This isn't just a supply constraint issue. It's really a demand acceleration standpoint. And with demand – the combination of demand accelerating really has our teams working diligently on these things. It just puts us in a really good position at the end of the year, I think, to start 2022 off well in addition to, I think, just having a good backlog in the fourth quarter. Great. Thanks. I'll leave it there. Have a good one. Thanks, Jeff.
spk01: We have your next question from Andrew Obin with Bank of America. You may ask your question.
spk16: Yes, good evening. Good afternoon. Good evening, Andrew. Just a question on pricing. You know, just going back to the tariffs, you know, I just remembered that putting in pricing price cost was an issue. And we have a lot more cost and all of a sudden price is not an issue. What has changed, you know, inside Fortiv to enable this kind of pricing power? Because, you know, I just recall like three years ago was a lot more of a drag.
spk18: Well, I think a couple of things. One, we've been working at pricing all year long, and I think what you're remembering is we offset the tariffs, but on a one-for-one basis, and so that created an operating margin drag, you know, because... Equal amounts of price and cost will do that. In this case, what we've been doing is staying ahead of that and getting, you know, as Jim mentioned, in our hardware business, this is up to 300 basis points of price. And we still are getting PPV and taking it out of the business. But we are seeing that getting chipped away at. But we've been able to stay ahead, and that's why we're delivering margin expansion.
spk16: Thanks. And just a follow-up question, you know, looking back, You turn out to be prudently conservative on your view on elective procedures relative to everybody else and, frankly, us. But where do you see elective procedures sort of going over the next three to six months? What's the pace of improvement as you see it globally? Thank you.
spk10: Yeah, thanks, Andrew. You know, what we saw, I think we ended Q3 at about 88%. Obviously, the Delta variant had impact in the quarter as the quarter progressed. We're assuming for the fourth quarter about the same, no real uptick. I suspect when we get a number, you know, the federal vaccine mandate in the United States continue to get, hopefully we start to get kids vaccinated here. Hopefully we'll start to see in the first quarter, start to see some of those procedures coming back. And we'll get to the first quarter once we finish the fourth. But specifically for the fourth quarter, our assumption is things stay about the same as they are today. So, you know, we're in a really good place at ASP. As we mentioned, we had, you know, not just to follow on your question, a very good quarter at ASP. Equipment came in better than we anticipated to offset some of the headwinds from what we had on consumables. you know, on a continuous basis in 2022, we'll be in a really good position to take advantage of that. I'll leave it there.
spk01: Thanks, Andrew.
spk10: Thank you.
spk01: We have your next question from Julian Mitchell with Barclays. Is your lines open?
spk13: Hi, good afternoon. Maybe just the first question around the core growth guidance for Q4. So I think it's sort of plus five at the midpoint. You've probably got around three points of price in there. So it's sort of two points of volume growth. um is that reflecting uh you know just a big slowdown in the sort of short cycle hardware businesses as their recovery has matured um maybe is there something going on in china i saw there was a big slowdown is that maybe going negative in in q4 maybe just any context around the the sort of volume growth assumption for q4 please sure there's a couple of things i think um
spk17: The way you're looking at it, 200 basis points is the price increase.
spk18: 300 is specific to the hardware businesses, so 200 overall, but you've got that about right. But when you look at it on a two-year stack, we actually think we're still expanding, increasing our growth rates in Q4 versus even Q3. So I think that's important. Also, I think as we noted, bookings are actually very strong here. So what's implied in the growth, what we're able to get out the door right now, isn't really reflective of the underlying demand of the businesses. And, Julian, I'd just say a couple things.
spk10: One, as Chuck said, the underlying demand on the orders for the second half is double digits, so very good order. You know, from a demand perspective, we're seeing good demand. Relative to your China question in the quarter, we had good growth at Fluke and at ASP and, you know, as well as in Sensing. We'll see China get better in the fourth quarter. simply because while tech had a little bit lower growth in the quarter, they had over 20% order growth. And so we will see China get back to mid-single-digit-like growth in the fourth quarter. So we've seen good point of sale in China. So we're watching it carefully, certainly because of a lot of the headlines. But we had a good quarter. Chuck and I were on with the team last week doing an operating review. They're optimistic about what's happening on the ground there. And the fourth quarter should improve sequentially from the third to the fourth.
spk13: That's very helpful. And then just a quick follow-up around operating margins. So you had very strong incrementals in Q3 year-on-year company-wide. It looks like for the fourth quarter, maybe you're assuming, you know, something in the maybe mid-30s operating. Is that just the sort of the run rate going forwards for where we are with current sort of volume growth outlook and price cost and service channel coming in? Or is there anything sort of specific moving around in Q4?
spk18: So our underlying assumption is 40% incremental, and I think when we print Q4, I think that's what we're seeing. Maybe when we get to the follow-up call, we can talk about service channel and if that's confusing your model. But we have the incrementals in Q4 around that 40% as well. So not seeing any slowing there.
spk01: Perfect. Thank you.
spk18: Thanks, Julian.
spk01: We have your next question from Nigel Coe with Walt Research. Your line's open.
spk12: Hi, Nigel. Good afternoon, guys. So just going back to the restructuring, I think you said $12 million, Chuck, about half of that in iOS, I think. The decision to do that, was that just because you were coming in, you had a plan, and so you just decided that it's a good idea to maybe do some investment here? And how should we think about this? Is this something that we can consider to be sort of a quote-unquote one-timer, or would the intention be to do quite a restructuring of this sort of magnitude in 2022, 2023 as well?
spk18: Well, first of all, I think we always had an intention knowing that we'd bring on these day two countries and we'll need to continue to make some adjustments as we go forward to them at the ASP realm. And I'd also say that as we come out of COVID, we're going to continue to evaluate our footprints here and see what we need going forward. Then that's probably going to be an evolving thing. So you could theorize that we could see that going forward, but it's not like we have a plan we're going to do a certain amount each quarter. It's as we see what the situation is and we need to make a change, then we'll tell you about it.
spk10: And, sorry, Nigel, the other part of it is we did some in the third within the business in sensing to do some factory relocation as well. So, you know, really in the second half, these are really ideas around the second half. And, you know, quite frankly, I think puts us in a good position. As we come together with our return-to-work plans, it really says that in certain – some of the businesses we have, we can take our footprint down. And so we're obviously going to take advantage of those opportunities as they come at us.
spk12: Great. And then on accruance, low single-digit growth – versus mid-20s bookings. So obviously a big disconnect there. Maybe just update us on how you see the revenue momentum at accruance. I think there's a SaaS transition going on there. And maybe just touch on as well the net retention of 102. That's a year-to-date metric. Is that changing at all through the quarters? And what's your target around net retention?
spk10: Yeah, so relative to our current, you're right, we had a little bit slower revenue growth there, but we did have good bookings, really strong bookings in several of what we call the growth businesses. We called those out in the prepared remarks, but really strong bookings relative to the performance in those businesses. So I think we're set up well for mid-single-digit in 2022. But you're right, we had a one-time hit on revenue that occurred in the quarter, a couple of little churn events or mini-churn events that we didn't anticipate. So it certainly slowed it down a little bit in the quarter, but we think because of the order strength, particularly around new logos, We're in a good position for next year. Relative to the 102, you know, we're always going to have some businesses up and down relative to where that number's at. You know, Service Channel and eMate would be our best performers on that metric as an example. IntellX would be pretty high. But, you know, I would suspect we'll get to sort of think back to 100 basis points of improvement in 100 to 200 basis points of improvement, somewhere in that range each year, at least for the next few years as we continue to, you know, while these businesses are still... We have your next question from Josh Pokrasinski with Morgan Stanley.
spk01: Your line's open.
spk09: Hi, good evening, guys. Hi, Josh. So just a follow-up question, not to nitpick on some of the margin differences here with the restructuring and then service channel coming in, but I just want to make sure I'm understanding this right. In intelligent operating solutions, if we sort of add back in that half of the restructuring that goes there, it doesn't look like X service channel.
spk17: There's really much of a difference in margins in 4Q.
spk09: Is there something seasonal there or supply chain that's sort of interrupting that, or am I just sort of putting this under a microscope unnecessarily?
spk17: There's just – we're talking about some of the highest margins we've gotten in the company.
spk18: So happy to get through your planning sheet with you in detail and to help you understand that.
spk17: But we're seeing sequentially – margin expansion, I think, at all of our businesses.
spk09: Got it. And then just in terms of, you know, kind of your specific afforded flavor of supply chain, you know, maybe talk about, like, the one or two things that would be particularly helpful. I know, you know, some folks are really focused on chips. Others have, like, freight and air freight or labor as issues. Like, What would sort of be kind of your top one or two things, Jim, that would be best to see?
spk10: Yeah, well, I could take you through a lot of detail because I think I've been more involved in these kinds of things over the last 60 days than I typically would. It takes me back to some roots, I guess. Josh, I would say a couple things. One, certainly in our businesses, think of it as the circuit board at Tektronix, which is incredibly complicated. It has multiple systems. semiconductors on it has multiple you know all kinds of chip technology on a board like that you're going to just have higher variability because of that Fluke will be as true as well, and then fencing a little bit less. So from just how that goes, that's how it would be. We are seeing mostly electronic shortages, and as I said in a previous comment, mostly around availability. We're paying a little bit more to get things, so there's some premium freight involved in the inflation. Not a lot of labor. We have pretty low labor content in the company simply because of our decades of productivity initiatives. So we're seeing some labor inflation, but at the end of the day, it doesn't move the needle as much. It's really about the material availability first and foremost. And given our gross margins on those products, it makes sense to, you know, even if we spend, you know, a few pennies more to get something in faster, given the high demand we have right now and, you know, just given the momentum in orders right now, it makes sense to sometimes pay those things because ultimately the margins, it just makes sense And obviously our first and foremost is taking care of customers. So hopefully that gives you a window. Every day we're well set up to deal with this because we have daily management, what we call visual management. You've seen it in our factories during tours. You know, our businesses put that on steroids a little bit in order to amplify the challenges and just get how well we countermeasure that really makes the difference.
spk17: Appreciate it. Best of luck, guys. Thanks.
spk01: We have your next question from Marcus Mittermeier with UBS. Your line is open.
spk04: Hi, Marcus. Hi, good afternoon. Hey, hi. I wonder how agile pricing is in your backlog. I mean, 40% backlog increase year-over-year sounds great on the one hand, but it's a double-edged sword, obviously. So once things hit your backlog, how flexible are you to adjust price further if you have to?
spk17: Well, number one, I think what we do is sell into distribution or limit the amount of buying that can occur at pricing.
spk10: So if we have a price increase stated, we obviously have contractual terms markets, and we will contract.
spk17: We work with our channel obligations to not necessarily something like that. So part of how we work with channel partners.
spk10: We've been able in many OEM cases to reprice orders as well.
spk17: So I think it really speaks to it. I think others have talked about having problems and continue to get the price here going forward and to know that our price costs will continue to improve.
spk04: That's good to hear. And then maybe one other follow-up on ASP. You talked both a bit on elective procedures where that's trending, but in your opening remarks, you also commented on installed base growth. So if I look into 2022, you know, what's potentially the bigger driver here?
spk03: Because it seems like the positives as well. So if I get that and I get elective, procedure recovery, sort of what sort of growth should we be dialing in here?
spk18: Marcus, you know, I think that you're right. Our underlying business and placing units is continuing to accelerate, and we're very proud about that. I think electric surgery is coming back. You know, it could be quite a bit of the growth if it all springs back in one year. But I think we need to get closer next year to really see what they actually do and what month. But I do think that it's a – Just to answer your question, if it all came back at once, that would be the bigger driver of the year for ASP and be quite a tailwind coming forward. But we're not calling that all coming back at once in 2022. It will probably ramp. It's over some period of time.
spk10: And I think, you know, Mark, it's one thing we know to be true over the last, certainly over the last two years, but certainly in the last six months. is that something has occurred every three months relative to electives that's caused it to go a little bit sideways. So I think it's premature to call next year, but it's safe to say that when we get to a more normalized sort of event in our hospitals, will be in that business is certainly laying the groundwork, laying the foundation for good growth. I was with a major hospital network about a month ago in their facility. They're placing equipment, and they're looking forward to adding more elective procedures. as they get forward. And maybe just one other comment on electives. It's not only COVID. It's also, particularly in the United States, it is also the nursing shortage. So it probably doesn't snap back, but it certainly comes back over time, which we really are looking forward to, obviously.
spk17: Thank you very much.
spk01: We have your next question from Andy Kaplowitz with CD Group. Your line's open.
spk00: Hey, good afternoon, guys. Hey, Andy. So obviously, Fortiv continues to have a really strong balance sheet. I think you said 1.3 times leverage at the year end. So could you talk about the M&A environment out there? We've obviously seen a flurry of software-focused acquisitions after your service channel acquisition. And I know valuations continue to be on the rich side. But do you see Fortiv remaining active over the next few queries on the acquisition front and would you lean toward continued focus on recurring revenue and or software related assets such as service channel?
spk10: Well, you know, Andy, as we've said over the last few years, and you know that as we've talked to you, we remain very busy. And I think we're working on some hardware things. We're working on some software things to advance what we do within workflows with customers. So I think we have a balanced approach to things. I think we see lots of opportunities to deploy capital in ways that really not only accelerates our strategy but gets us good returns, is additive from a growth perspective. We're certainly going to lean in on recurring revenue.
spk17: We think that's a good way to, you know, we would say we're certainly leaning towards those kinds of opportunities. As we know, even industrial scientific or Landauer, or certainly ASP, we had a heavy amount of recurring revenue in those deals, even when they were hardware.
spk10: So we're going to continue to look for those opportunities, not exclusively, but probably the majority of the things we're doing is really going to have a passion for growth, but also with that idea that we can continue to build a more durable, resilient growth rate.
spk00: Thanks for that. And then maybe if I could follow up with asking you about tech in sort of a different way. You've always had good momentum there, and you talked about new product introductions this quarter. I know you've mentioned tech's continuing strategy of focusing on data centers, EVs. So is that where the momentum continues to come from? And is tech's growth just maybe on a higher plane versus past cycles, given this sort of change in focus?
spk10: Well, I think number one is it's more resilient because, you know, we had, I think, low-digit growth in our service business, but, you know, just a resilient, durable base and foundation of revenue that we built over time. So number one, I think we've got a more resilient, durable growth rate just because of that service business that we've built into the revenue stream. We've got some software offerings there that we've started with. We mentioned that in the prepared remarks. So we're building a more durable revenue stream while at the same time, as you mentioned, we've taken advantage of a number of real opportunities. relative to, you know, what I would call higher growth situations. And quite frankly, when we think about going forward, obviously the semiconductor cycle is going to extend as people continue to invest in the kinds of things that we've talked about. But also, these supply chain issues and constraints fundamentally require a lot of folks who have electronics in their products to redesign those products for different ships or different components. And quite frankly, one of the things they need to do that is an oscilloscope. So we think there's also not only the sort of long-term secular trends that the business has been going after, but also some shorter-term opportunities as people start to continue to have to deal with some of these supply chain challenges. And fundamentally, that can often end up in a redesign. And certainly, we have the products and solutions to help people do that. So it has a component of volatility to it. But I think the team has done a nice job. Appreciate it, Jim. Thanks, Danny.
spk01: We have your next question from John Walsh with Credit Suisse. Your line is open.
spk18: Hi, John.
spk02: Hi, everybody. How are you? Good. Maybe just a first question going back to the gross profit margin improvement in the quarter. Obviously, very nice in the face of inflation. You called out the price-cost benefits in kind of the hardware businesses, but wondering if you're also getting a lift from kind of this portfolio mix that you've been doing towards more software, more SaaS revenue, or if that's not yet showing up.
spk17: Just curious how you'd parse out that growth.
spk18: No, I think that's a good question, especially when you take a look at our software businesses. You heard Jim mention a little bit where we also see price and great margin expansion. And when you've got those businesses with their great margins growing faster than the fleet average, that's going to give you a lift as well. So it's certainly our software businesses, but also staying ahead on the price cost is very important in offsetting what's a challenging environment.
spk02: Great. And then, you know, you obviously highlighted both the internal and external promotions here. I was wondering if you could just give us a look kind of the next layer down and kind of your ability to keep the talent from the acquisitions that you've made. Any color there, please.
spk10: Yeah, sure. Well, we're incredibly excited to have Illumiday join us. We obviously announced that earlier in the quarter, and he's off and running iOS, and really we're excited to have him join the team. He brings a real view on software. It's really all his experiences in software. And he created an enormous digital data analytics capability at CoreLogic. So he really brings data, you know, a data-centric approach to these businesses, which I think is a wonderful part of his leadership style. Obviously, Tammy's promotion is a great view on our internal development capability and a window on how we develop internal talent. So we're in a very good place with her promotion. Relative to the next layer down, we announced two internal promotions, both of whom came with acquisitions, Justin and Bill. Both came to us with acquisitions, Justin with ISC, Bill with Gordian. And so the promotions that we announced in the prepared remarks is a good example of how we continue to retain folks from acquisitions. and how they're additive to our leadership capabilities. So, you know, we have a very rigorous internal development process. We announced several internal president appointments here recently as well to backfill for people like Bill and Justin. And we're in a very good place relative to adding talent. On the healthcare side, we brought in some new real new talent from a healthcare standpoint at ASP to really give us, you know, even be additive to our healthcare experience. So I think we've not only have been able to retain people through a very rigorous development process, but we've become a destination for talent, and we've certainly been able to recruit some top-notch talent. We mentioned Reed Simmons as our head of strategy in the second quarter. We've continued to take opportunities to bring in folks who bring new approaches, and we've been very successful in being able to do that.
spk02: Great. I'll leave it there. Thank you.
spk01: Thanks, John. We have your next question from Joe Giordano with Colin. Your line's open.
spk06: Hey, guys. Thanks for taking my questions.
spk01: Hey, Joe.
spk06: Okay, so one of your competitors to tech was talking about having success in integrating protocol analyzer capability into their scopes. So like connected devices, is that something that you're doing or is it something you think is worthwhile? Just curious if that's an offering yet.
spk10: Well, I think at the end of the day, we have some protocol capability, but I think it depends on the use of the scope and the range of the scope where that's appropriate. So I would say that our direction has been more, rather than adding additional measurement capability to some of the scopes, we've been really adding more solutions focus to really different probes, different software around the application. to really help folks that's where we've been really successful in uh in automotive and in data centers of really bringing forward call it the post scope uh work that really helps you know really helps the the the engineer in the application specific application that they're they're moving forward with okay and then and then jim you're going into well when you guys gave guidance last time you knew electives you you were you know appropriately cautious on elective surgery um
spk06: supply chain was bad then. I'm just curious, what are the one or two single biggest top-line variances that end up being realized versus what you thought last time? In the third quarter? Yeah, versus when you gave it.
spk10: Yeah, I mean, I think electives certainly were part of it. We thought electives were going to be, you know, we were conservative on electives, but we were, you know, they were lower than we anticipated. So you could probably think about, you know, maybe $10 million of revenue that was, you know, there, just there. And then certainly on the, we could have easily hit in the upper end of our guide relative to revenue, which is roughly 300 basis points, if we hadn't had some of the supply chain constraints there. um, that, uh, that ended up, you know, we always said the September is a big month and, you know, we had several things that hit us in September, uh, that, uh, that we didn't anticipate. So, you know, we, we still managed as, as we noted to have tremendous margins and tremendous free cashflow despite those challenges. And I think that's really, uh, that really speaks to the power of FBS and in terms of facing challenges, being able to countermeasure through, through those things. And, you know, this isn't a story of the absence of challenges, but rather the ability to deal with them. And that's what we'll continue to do in the fourth quarter. And you didn't ask it, but I would anticipate that we'll be dealing with a number of the supply chain issues well into 2022.
spk06: Can I just clarify one thing? The stuff that you couldn't get out from supply chain, is that because you couldn't I guess, can you break it down between stuff that you were able to manufacture and the customer wasn't ready to take delivery and it's now sitting in inventory, or it's stuff that you just couldn't get the components on your side to kind of manufacture?
spk10: No, this is all us not getting components. We have, you know, demand picked up tremendously through the quarter. As we said, we had very strong orders. And we'll have strong orders through the rest of the year. So our demand profile is very good. Customers are taking things as soon as we can get them to them in most cases. So this is not an inventory situation or anything like that. This is, you know, purely a component shortage challenge that we're dealing with as, you know, I think it's been well documented by a lot of other companies. Sure. Thanks, guys. Thank you.
spk01: We have your next question from Andrew Buscaglia with Berenberg. Your line is open.
spk08: Hi, guys. I just wanted to ask on advanced healthcare as well. I mean, it doesn't seem like it will exactly be a snapback situation. You're facing some tough comps into the first half of the year. So I guess the question is where, you know, I get the FBS, but where – will we see some margin leverage? Like, I guess what needs to happen to, you know, to really see those margins pick up and kind of more muted, you know, first half maybe.
spk18: Well, I think, you know, first in Q3, we saw some outstanding margin expansion in the advanced healthcare segment, you know, going from, I think, around 20% in Q2 to 23% of adjusted operating profits. So we're seeing good margin expansion, and that's not just at ASP. You know, Census had a really good quarter. So did Fluke Health. And our hardware placements there. And so you're seeing that already. What we're saying is it could have been better with elective surgeries, and that's going to be a future advantage. But let's be clear, we had a good step up between Q2 and Q3 in health. And from Q3 to Q4, we expect to do another 100 to 200 basis, even with elective surgeries, just staying where they're at right now.
spk08: Okay, fair enough. And, you know, Chuck, maybe you can comment. I know M&A is definitely on the top of your mind with given where leverage is. But, you know, stocks is kind of getting cheaper here and kind of has done a whole lot the last year. You know, what's your thoughts on a buyback or, you know, maybe choosing that as a different avenue for the cash market?
spk18: We remain very optimistic about the opportunity to deploy capital. You know, we laid out that we had probably $5 billion the first three years post-separation with Volunteer. You know, we've done 1.2. It's not like we're running way behind there. So we think we've got ample opportunity for that, and so we're not changing our priority being M&A. Yeah, okay. Thanks, Chuck. Thank you.
spk01: We have your next question from Steve Tusa with JP Morgan. Your line is open.
spk05: Hey, guys. How's it going? Hey, Steve. How are you? Doing all right. Just a question on the AHS margins. I think if we kind of backed into a number last quarter, they were a little bit higher exiting for Q. I don't know if, you know, you did a better job on margins this quarter. Is there anything going on there? Is there a, like, is that elective procedures? And, you know, can we still kind of think about a potentially kind of high 20s margin as we look out into kind of next year?
spk18: First of all, I think that margins, we expect margins to expand for a number of years in health, as we discussed. Yes, they're lower in Q4, and it's all about elective procedures being around 90% rather than the high 90s. That's somewhere around $12 to $14 million of 75% to 80% margin business. And so when you do that, that clipped off about 200 basis points of margin expansion, but we're still expanding margins from Q3 to Q4. And we know that electric procedures are going to come back. So today's headwind there is tomorrow's tailwind. But the destination or going into those high 20s, that's still what we think is very possible. Nothing's changed about that.
spk05: Got it. And then just heading into next year, you know, you're exiting at kind of a mid to, I guess, mid to highs on organic. I mean, anything about the comps next year that would make that exit rate kind of unreasonable from an organic perspective? You know, should next year be more in line with your longer-term guidance amid singles, or can you maybe do a little bit better than that, given the headwinds you're kind of facing here in 3 and 4Q with the supply constraints?
spk10: Well, it's safe to say that, you know, we're going to end the year in a backlog position we never had before, Steve. That would certainly suggest some great opportunity for us next year. I'll hold my enthusiasm until we get to the full year guide. But, you know, things are setting up pretty well. Orders are very strong. They're going to continue to be good in the fourth. There's a lot of variables out there, obviously, that are still to be considered as we play out the rest of the quarter to give consideration to. But, you know, as Chuck just said, relative to how AHS is setting up, we certainly talk about the software businesses, even where we had a little bit less growth at a current, we had good orders. So, you know, we think we can continue to build on our net retention strategy. So I think we're certainly setting up for some good things. But let's get through this quarter. I'm pretty focused on the things we've got to do right now to deliver October. But we'll get there pretty soon. And, obviously, I think if it plays out the way we think, we'll certainly be in our best backlog position that we've ever been in.
spk05: Great. All right. Thanks for the call, guys. Appreciate it.
spk10: Thanks, Steve. Thank you.
spk01: I'm showing no further questions at this time. I will turn the call back over to Mr. Whitney for any closing remarks.
spk10: Well, I think I'll take it from Griffin, but thank you, Alexander, and thanks, everyone, for your time tonight. We appreciate it, as always. We benefited from the hard work and determination of our 17,000 employees all around the world. We appreciate all your support, and we'll look forward to continuing to follow up with any questions you might have around the quarter as we get into the finish of the year. Thanks, have a great day, and have a great earnings season. Bye-bye.
spk01: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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