Fortive Corporation

Hello, my name is Josh and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to 4DF Corporation's 4th 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 star then the number 1 on your telephone keypad. If you would like to withdraw your question, again press star 1. I would now like to turn the call over to Ms. Elena Rossman, Vice President of Investor Relations. Ms. Rossman, you may begin your conference.

Thank you, Josh, and thank you, everyone, for joining us on today's call. With us today are Jim Leko, 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 Regulation G are available on the Investors section of our website at sportive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons on a continuing operations basis. During the call, we will make forward-looking statements. 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 actual results might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available on 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 would like to turn the call over to Jim.

Thanks, Elena. Hello, everyone, and thank you for joining us. We delivered solid performance in the fourth quarter, closing out a very strong year as we focused on delivering for customers in an ongoing challenging environment. While we saw sequential growth and margin expansion across the portfolio, revenue in the quarter finished roughly $50 million below expectations as continued supply chain constraints and the impact from the Omicron surge hindered our ability to deliver on our robust orders and backlog. Our businesses performed well despite these challenges, generating 190 basis points of core margin expansion and 13% adjusted earnings growth in the quarter. Our tax rate was flat on a year-on-year basis at 9%, however lower than our expectations coming into the quarter. Pre-cash flow and conversion were lighter than expected as we invested in inventory to support customer demand and saw lower customer receipts at year-end. For the year, we delivered core revenue growth of 9.5% and expanded adjusted operating margins by 210 basis points, driving 32% year-over-year growth in adjusted earnings. Strong demand for software-enabled workflows yielded double-digit software growth in 2021 and the fourth quarter. These results are a testament to the higher growth, more resilient, higher margin portfolio that we have constructed through organic innovation and strategic M&A. With this portfolio and our team's disciplined and rigorous application of the Florida business system, we are well positioned to deliver long-term, sustainable value creation for all of our stakeholders. As you can see on slide four, all of our segments contributed to our solid fourth quarter results, including over 100 basis points core operating margin expansion in each. Supply chain constraints within both our supplier and logistics networks, as well as COVID-related challenges, suppressed core growth across a number of our businesses. Looking at the segments in more detail, Intelligent Operating Solutions posted total revenue growth of 6.4% in the fourth quarter, with core up 0.8%. This included low single-digit growth in North America and high teens in China, partially offset by high single-digit decline in Western Europe. Starting with Fluke, core revenue declined slightly as continued end market demand and order growth across its product portfolio were more than offset by supplier and logistics network challenges constraining revenue in the fourth quarter. Fluke Digital Systems performed well with 20% plus growth supported by strong demand for its E-Mate SaaS offering and capped the year with greater than 30% growth in ARR bookings in Q4. Fluke also continued to see momentum within its product innovation pipeline. They introduced a new market-leading power quality platform, the 1770 series power quality analyzer, and we're seeing continued strength in their acoustic imaging product line. Orders were up high single digit in the fourth quarter, up 20% for the year, contributing to significant backlog growth in 2021. The team remains highly focused on improving supply management, logistics, and factory throughput to deliver on the backlog in the year ahead. In EHS, industrial scientific revenue increased mid-single digits, led by the continued recovery of its rental business and improved net retention for its INET offering. Intellect grew by mid-teens, with the fourth quarter representing the strongest net dollar retention we've seen in the past two years. Strong customer service execution reduced churn, and the application of funnel management tools helped deliver a record year for customer upselling. In addition, Intellects and IFC continue to see success with their award-winning hazard IQ solution, connecting real-time field data with EHS management software from Intellects. As anticipated, a current decline in the single digit, although it was up sequentially despite less billing days in the fourth quarter. On a same-days basis, their SaaS sales would have been up mid-single digit. Accruant continued to capitalize on strong demand for its EMS product line due to continued momentum in return-to-workplace solutions, with bookings up greater than 20% for the quarter and almost 50% for the full year. Accruant also posted its second-highest quarter on record for SaaS bookings and drove another quarter of improvement in net dollar retention as it continues to deploy FBS tools to deliver on a higher on-time renewal rate across its growing SaaS customer base. We expect to see this result in higher growth in accrued in 2022. Gordian increased mid-single digit driven by another strong quarter in procurement. Gordian also secured some notable wins in the fourth quarter, including the capture of two new state and local education customers, Clark County in Nevada and the Dallas Independent School District. Both are expected to begin generating revenue in the second half of 2022. Service Channel is off to a good start following its acquisition in August. Revenue grew substantially in the fourth quarter, with SaaS increasing low double digits and SaaS bookings more than doubling on a year-on-year basis. Service Channel is successfully expanding its new logo pipeline with some notable wins in the fourth quarter, including the leading health and beauty retailer in the UK, and is leveraging FBS tools and implementing lean portfolio management to position the company for additional innovation and growth. Moving to the middle of slide four, The precision technology segment posted a total revenue increase of 2.1%, with core growth of 2.6%. This included mid-teens growth in China, while Western Europe was up slightly, partially offset by a low single-digit decline in North America. Tektronix grew low single-digit despite strong customer demand driving double-digit order growth across its major regions, resulting in a book-to-bill of 1.2 in the fourth quarter. Orders for mainstream scopes and momentum in new product introductions are driving backlog levels to all-time highs as customers continue to invest in new capabilities across a range of end markets. Tekt continues to benefit from FBS, which helps to reduce supply chain risk and improve price realization across the business. Sensing technologies increased high single-digit in the fourth quarter, with good growth in its industrial, semiconductor, HVAC, and medical end markets, despite continued supply chain challenges. Similarly, Pacific Scientific EMC built further backlog in the quarter as supply chain constraints persisted. PacSci continued to see strong bookings growth in its core market, including aircraft and space, while revenues declined mid-teens, resulting in a book-to-bill of 1.13 for the year. Moving to advanced healthcare solutions on the right side of slide four. Total revenue increased 1.5% despite a core revenue decline of 0.8%. This included high single-digit growth in China, flat performance in North America, and a mid-20% decline in Western Europe. Starting with ASP, revenue declined no single digit in the fourth quarter. While we have grown the install base, consumables continue to be impacted by lower elective procedure rates, especially as the Omicron variant surged in the U.S. in December, adding to existing skilled staffing shortages at hospitals and ambulatory surgical centers. These challenges primarily impacted revenue in the U.S., while our high-growth regions grew double digits. We are also pleased with the continued evolution of FBS with significant progress in operating margin expansion in the business. Census revenues increased mid-single-digit, highlighted by another quarter of strong growth in its core CensusTrack SaaS offering, which increased in the low 20% range. As in prior quarters, CensusTrack continued to see good momentum, adding new customers and improved upselling and cross-selling to existing customers. Cook Health Solutions increased mid-single-digit as revenue and margins benefited from growth investments made throughout the year, driving strong double-digit growth in its biomedical test equipment business. And Invitec declined low single-digit as it lapped a top prior year comparison that included strong COVID-related revenues in 2020. Our strong margin performance in 2021 is just one example of how FBS continued to be an important differentiator for Fortis. As shown on slide five, FBS is enabling our businesses to improve operations in our plants, tackle mounting supply chain and inflation headwinds, drive innovation and profitable growth across the portfolio, and build skills and capabilities in our leaders to effectively drive sustainable business. Examples in the corridor include the reduction in supply chain risk at Fluke, ISC, SensiTech, and Tektronix through significant use of OBEA and daily management to manage the complexity and uncertainty associated with part shortages. ASP significantly reduced freight expense by over 100 basis points of revenue, contributing to their margin expansion in the quarter. Through the deployment of lean portfolio management, our newest FBS innovation tool, Tektronix overdrove revenue achievement on recent new products, including the just-launched next generation of its 5-series MSO offering. We are also making meaningful improvements in net dollar retention in our software businesses, allowing us to deliver more profitable and accelerated growth in eMate, which finished the year at 108% net dollar retention, while the current also increased monthly on-time renewal rate over 15 points from the beginning of the year.

Despite COVID, we have continued to support all of our leadership development and Kaizen activities,

as a result of the rigorous application and dedication by our teams we're continuing to benefit from our culture of continuous improvement turning to slide six we made significant progress executing our m a strategy in 2021 as we continue to evolve our portfolio to serve higher growth markets with attractive long-term secular drivers Both service channel in our IOS segment and probation in AHS are acquisitions that significantly accelerate our strategy to deliver a broader offering of software-enabled solutions to address our position best-in-breed SaaS platforms.

Combined, greater than $200 million of high-growth software revenue with high incremental margins

The service channel's proprietary data assets and networks receive significant upsell and cross-sell opportunities across our facilities and asset lifecycle management businesses. And with probation, we are strengthening our presence in hospitals and ASCs with expanded software and data opportunities, leveraging leading positions in GI to capture multi-specialty expansion opportunities. Together, we expect these businesses to generate more than 12 cents of earnings accretion in 2022 and will enhance our growth and free cash flow profile going forward. I'm also incredibly proud of the work we've done in 2021 to continue our progress towards building a more sustainable future. As you can see on slide 7, today is a diverse board and leadership team with recent hires advancing our commitment to top talent and diversity. We recently ran our day of caring for the fifth time since the company became public. And in that time, our employees have dedicated over 400,000 hours of employee volunteer time to help more than 300 communities in 30 countries across the world. We are well on our way to achieving our carbon emission reduction targets and recently completed our TCFD reporting gap analysis to strengthen our governance and management of climate change-related risks and opportunities. We are actively engaged in responsible sourcing initiatives, and we take seriously the need to understand both the labor and the human rights practices across our supply chain. In 2021, we became a signatory to the UN Global Compact, further embedding our commitment to a sustainable future in our company's strategy, culture, and daily operations. And we were also named one of America's most responsible companies by Newsweek for the third consecutive year. It's our shared purpose that also pushes us to create innovative and sustainable products and services for our customers, trying to solve some of the world's biggest sustainability challenges. We look forward to continuing to make progress on our sustainability journey in the years to come. With that, I'll pass it over to Chuck, who will provide more color on our fourth quarter financials, our free cash flow, and our first quarter and full year 2022 guidance. Thanks, Jim, and hello, everyone. I'll begin on slide eight with a quick recap of our fourth quarter performance. We generated year-over-year total revenue growth of 3.8% with core growth of 1%. Acquisitions contributed over three points of growth in the quarter, primarily from service channel, while FX was a modest headwind. Year-over-year orders and backlog in our hardware businesses grew 14% and 84% respectively. Adjusted gross margins approached 58% in the quarter, and operating margins were 24.4%, near the high end of our guidance. This reflected 190 basis points of core operating margin expansion with over 200 basis points of price realization. Turning to the right side of the slide, Jim covered the segment highlights earlier, and I wanted to provide some further color on the regions. North America revenues were roughly flat, reflecting strong demand across multiple end markets, offset by supply chain constraints impacting tectronics and fluke, as well as lower consumables at ASP. Western Europe saw year-over-year declines across much of the portfolio, including a difficult COVID-related comparative in the tech. That said, we had good growth at ASP where elective procedure rates have held up better and consumables are benefiting from recent growth in our installed base.

Asia, as well as our high-growth regions, grew revenues double digits in the quarter, driven by mid-teens growth in China with strong performance across the portfolio.

Turning to slide nine. We generated $265 million of free cash flow in the fourth quarter, representing a robust revenue plan for 2022. And we also saw a change in receivables trend with lower customer receipts in the fourth quarter than we had expected. Staying with cash, we deployed 2.6 billion to M&A in 2021 and ended the year with net leverage of 2.4 times. We estimate M&A capacity of approximately 5 billion over the next three years, and the funnel remains full across each of our segments with both hardware and software opportunities. We remain disciplined. looking to add assets to our portfolio that significantly enhance the leading positions of our segments and increase our value propositions to our customers. Turning now to the guide on slide 10, as we look ahead, we expect that in 2022 will be another year of differentiated growth and margin expansion in each of our strategic segments, supported by secular tailwinds and continued strong demand backdrop and a robust backlog heading into the year. 2022 outlook is based on a balanced set of assumptions, including the likelihood that supply chain constraints will persist through much of the year with continued strength in orders at least through the first half. We expect to offset continued cost inflation and the benefits of our software strategy to generate double-digit software growth in 2022, taking total software revenues to $950 million.

And lastly,

In healthcare, we're planning for elective procedures to remain flat to 2021 levels in total, starting lower and ramping over the course of the year. Turning to the next slide, we are introducing full-year 2022 guidance with revenue in the range of $5.7 to $5.9 billion, representing 5.5 to 8.5% core growth, while acquisitions net of unfavorable FX will contribute an additional 3.5 points of growth for the year. Adjusted operating profit margins in the range of 24 to 24.5%, with margin expansion in each guidance of $3 to $3.13, up 9 to 14%, with an effective tax rate of approximately 16%. Adjusting EPS growth normalized for tax would be 14% to 19% for the year. Free cash flow conversion is expected to be approximately 105% of net income, which would yield a 20% free cash flow margin. In summary, our portfolio continues to show the benefits of the actions we've taken to build more resilient growth company capable of converting to slide 12 and the first quarter guide. We expect a similar external environment as the second half of 2021 with Revenue of $1.34 billion at the midpoint, with core revenue growth in the range of 1.5 to 4% revenue growth from acquisitions net of unfavorable operating profit margin of 23% at the midpoint, up slightly year-over-year.

Adjusted diluted net earnings per share of $0.65 to $0.69,

assuming a 15% to 16% tax rate in the quarter, and free cash flow conversion of approximately 70%, slightly higher than our Q1 seasonal trend, reflecting partial recovery of receipts that slipped out of the fourth quarter. With that, I'll pass it back to Jim for some closing remarks. Thanks, Chuck. As many of you know, Ford celebrated its fifth anniversary as a public company in 2021. And as you can see in 2016, our through cycle core growth has doubled from low single digit to mid single digit, as we have more than doubled our base of recurring revenue and meaningfully added higher growth, higher margin software businesses to our portfolio. Our gross and operating margins have increased as well. We've improved gross margins over 800 basis points, 50 basis points per year. Operating profit margin expansion. Now we're talking about 75 basis points on average per year through the summer. And free cash flow is also up meaningfully to a 20% free cash flow margin in 2022, up from approximately 18% in 2021, further differentiating Florida. Wrapping up on slide 14, and before we move to questions, I'd like to thank our team members for their exceptional commitment to our shared purpose and core values, which underpin everything we do and how we do it. Even in the face of unprecedented supply chain constraints and prolonged focus and committed to delivering for our customers, each other, and our shareholders, delivering financial results well ahead. ahead of our initial expectations coming into the year. While each of our businesses continues to evolve and improve across key metrics, we know there's more to do. As such, we expect another year of differentiated growth and profitability in 2022, taking us one step closer to delivering on the multi-year targets set back at our May 2021 investor conference. Finally, we know you have a choice, and we want you to be with us for the long term. We're confident in the work we do to create long-term, sustainable, competitive advantages for our operating companies and our strategic sector.

With that, I'll turn it back to Elena.

Thanks, Jim. That concludes our formal comments. Josh, we are now ready to take questions.

And your first question comes from the line of Julian Mitchell with Barclays. Your line is open.

Hi, good morning. Good afternoon, Julian. Good afternoon. Apologies. I just wanted to follow up on the sort of organic sales guidance for the year. So you're starting out with, you know, core growth of low single digit in Q1. That's moving to mid to high for the year as a whole. And I suppose particularly in In iOS and PT, where there is a lot of kind of short cycle hardware, what gives you the confidence in that acceleration? I understand fully that supply chain conditions make it a little bit easier for you to execute on orders. But conversely, as you go through the year, we may find that orders slow down. And so I just wondered what gives you that confidence in that sort of second half or back half core acceleration in iOS and PT?

Yeah, good to hear from you, Julian, morning and afternoon, depending on our time zone here, I guess. First of all, I think when we look at the full year, as you said, we see some improvement through the year at Fluke and Tech. We had a very good fourth quarter in sensing, so I think the supply chain constraints have been in sensing, but we have good confidence there. I think when you look at the backlog situation at Fluke and Tech, as you point out, very strong record backlog in both businesses as we start the year. And quite frankly, we don't anticipate any backlog reduction in the first half and really minimal backlog reduction in the full year. So we see the demand side of this from an order perspective. We talked about that in the prepared remarks. As an example, Fluke up 20% in orders for 2021. So I think we definitely, and we're seeing the drivers that we've talked about, some of those secular drivers continuing to play out. So whether it's the strength and innovation, whether it's some of the things that we've been doing, in particular markets to differentiate the business. We see the demand front still very good in the first half. So certainly there'll be maybe a little bit of a slower growth rate from 2021 from an orders perspective. We still see the demand environment very good to deliver the year. And quite frankly, we think we'll go into 23 very strong as well.

Thanks very much. And then just my second quick one on advanced healthcare solutions. You know, it's been a tough period, obviously, for two or three years with the TSAs and then COVID and the lingering sort of aftermath. Just wondered, when you're looking at that business, you know, would you say that after that sort of tough three-year period, the guide is fairly conservative there for 2022 now? And how do you assess the competitive position of AHS? I suppose particularly in the ASP piece, do you think that's been losing share or it's holding its own?

Yeah, thanks. First of all, I think when we look at the fourth quarter, it's really indicative of our strategy playing out. When you think about one of the things we said from the onset is that we could take those high-growth markets and really regions outside of the United States, and if we brought them into a more focused business, we would deliver success. And you see that in the double-digit growth that we had outside of the United States in the quarter. We saw good mid-single-digit growth in capital around the world, And as we said, we've grown the installed base over the last few years. So we feel good about a shared perspective because we see that on the equipment side. As you point out, a little bit tougher on the electives than we anticipated. That's been a tough thing to predict. We feel we're going into the year relatively, maybe not conservative, but appropriate. in terms of looking what happened in the fourth quarter, not anticipating that getting better through the year. Even the Q1 may be a little bit lower on the electives as we see Omicron. But I think as we stand today, we had great margin expansion at ASP and in health in the fourth, and you'll see that in the first even as well. And we think the strategy is playing out very much. We've done a nice job on the gross margin and operating margin side at ASP. More broadly, I think we've positioned the segment well, the addition of probation, certainly another great add to the segment. So I think we've been appropriate relative to predicting ASP. And I think when you look at the core growth rate for the full year in 22, you see our strategy playing out more broadly, and you certainly see that as we accelerate growth through the year. and quite frankly, continue to deliver strong margin expansion.

Great. Thank you.

Thanks, Julian. Your next question comes from the line of Steve Tusa with J.P. Morgan. Your line is open.

Hey, guys. I don't know. Good afternoon, I guess. I don't know. I guess just cutting it a different way, how do you expect the year to build from a core growth perspective? Should we expect a nice step up in 2Q? Is the third quarter just maybe a little bit more color on the organic growth trajectory as we move through the year?

Hey, Steve, this is Chuck. What we expect is... probably not going to be a surprise. We're constrained right now with supply chain, but as we move through time, we expect that some of that will, you know, it will gradually accelerate, you know, and then we're talking about going from 3%, you know, up, you know, to high single, you know, up to 7% for the year. So I think that it just gradually, there's not a step function that happens, doesn't happen all at the end of Q4 is what's built into this guide.

Right, but to get to the high end, I mean, you're talking about something that's, you know, beyond that, obviously, where you're starting is how the averages work. So, I mean, are you going to be exiting the year at like a, you know, double-digit rate on organic?

Yeah, we would expect to. We think that we've got, as Jim talked about, strong order momentum coming into this year. We don't, while we expect that supply chain will allow us to increase our shipments, we're not sure that it, you know, and we have a really strong backlog position. So we do expect supply chain as we go through the year to get incrementally better each quarter and would have us exit the year very strongly.

Right, because, I mean, that, like, $50 million or whatever that you missed out on this quarter, I mean, if you just look at it on a quarterly basis, that's, you know, 4%, you know, of an impact in any given quarter from that. That kind of, you know, kind of lessens the trajectory to an extent there. Okay, and then just one last one on AFP. You know, why are you guys kind of – forecasting um electives to be flat i mean have you really seen a change in trend there that makes you worried is um you know that that seems to be like you know really conservative um so i don't know just something you're seeing that others aren't on that front

No, it's really that what we realized we haven't been able to predict it going forward. So what we want to show is, hey, this is where it is right now. You can see the margin expansion has been good all year long, and we don't expect us to have growth there. And this is what happens if basically the electives don't get better. And maybe, if anything, it's acknowledging that we can't actually predict that. We would say that if electives go up, then we'd have upside here. got it okay to add on to that you know maybe just add on to that real quick is that you know it's we typically think of this as the variant and the new variants it's also the combination we said this in the prepared remarks that there are some specialty staffing challenges in the united states And so we think it takes a little longer for that to come back. But I think the strength of the momentum building on the installed base and, as we said, the strength of really, quite frankly, the growth we've had outside the United States, those two combinations really showing our strategy play out. So, yeah, I think we've been a little bit more conservative on the electric side. But I think, you know, what we're seeing with the margin expansion and some of the things I just mentioned, certainly the strategy playing out and creating momentum for the business through the year. Got it. Thank you. Thank you.

Your next question comes from the line of Andrew Oben with Bank of America. Your line is open.

Yes. Hi, Andrew. Hi. How are you? Just a question, sort of a supply chain question for you. You know, after the tariffs, I think you guys made some adjustments to your manufacturing footprint. As we are sort of experiencing the supply chain constraints, particularly hitting Fluke and Tech, You know, what are your thoughts about how to make the supply chain more resilient going forward? Thank you.

Yeah, Andrew, I think number one, as we said, you know, supply chain constraints typically, I would think about that in two categories, one from a supplier perspective and the other around freight and logistics. So let's take the supplier side. You're certainly right, a number of our countermeasures that we had relative to the tariffs put us into some locations around the world in Asia that were hit harder by COVID. That's certainly been part of the challenge. The second part of it is when we think about microcontrollers, when we think about ASICs, when we think about FPG&As, those are components, particularly on the ASIC side, where we've really designed around sole source differentiated technology, which has historically given us better margins and better differentiated technologies. technology from a product perspective. You see that mostly in the higher end products at Fluke and at Tech. And that's why sensing didn't have as big an impact relative to this because they tend to use more commercial off-the-shelf products. So we're getting those things changed. As you said, the question of what we're doing, we're qualifying new suppliers, we're redesigning some platform architectures around the ability to source in different places. We're moving supply base out of some maybe higher risk COVID locations in the world. And all of those actions played out and will play out in the first quarter. That's where you see the core growth getting a little bit better at both Luke and Tech in the first quarter. And then it continues to improve through the year. So we're not anticipating necessarily a big shift in change relative to the supply side necessarily. in the year, what we're really seeing is the benefit of our countermeasures building through the year. So that's how we think about it. On the freight side, it's clearly freight lane challenges from Asia to the U.S., and you see some of that in the growth rates in Asia between Asia and the United States. Some of that is impacted by the fact that we just don't have to ship product as far when we're shipping product into Asia than we are into the U.S. So that's you know, a broad swath of the actions that we're taking. And, you know, it takes a little while to get some of those things all in place, but we'll see that improvement. We're seeing that improvement now, and we'll see it build throughout the year.

That actually makes a lot of sense. Thank you. And I missed the first couple of minutes, so I apologize if you've answered it, but I'm looking at slide 13, and you sort of brought out total software revenue for 21 and 22. As I think about the fourth quarter, what was the total software growth, and specifically If also you could give us a sense, zeroing in on SaaS, whatever metric you want to highlight, revenue or AR, just to see how, you know, what's happening there, because that's a big part of the growth strategy going forward. Thank you.

Yeah, total software growth was low double digits in Q4 and in the full year. So that certainly has the benefit of service channel. I think our core revenue growth was mid-single digit in the fourth. And I think really what we saw that was really good was our ARR growth in the fourth quarter was high single digits. I think we saw a good benefit from a number of our strategies playing out both core and certainly with the additions of service channel and probation that gets to the 2022 targets that we highlighted in the slide you're referencing. We'll see that growth be double-digit in Q1. So we're really seeing, I think, we saw some good benefits. It takes a little while on the staff side for that revenue to impact the full year. But as I said, we'll see it in the first quarter. Feel good about where we're at relative to the core businesses, but also what we had in both service channel and certainly what we're seeing early days of probation. Fantastic. Thank you very much.

Your next question comes from the line of Nigel Coe with Wolf Wolf Research. Your line is open.

Thanks. And I'll say good morning because it is morning where you are. So just want to dig into, you know, how did the sell-in versus sell-out for the channel play out?

Because I'm assuming that products, I'm just curious if,

the distribution channels. And any color on where inventories are right now would be helpful.

Yeah, thanks.

And I think I said this on the third quarter call, but when we think about inventory now, we also think about, given that we've got distributors have on order, so that we make sure we understand relative

to true demand versus maybe inventory building on their side. And I think in that regard, we see good sales out.

And we don't see big inventory on hand or relative to the inventory build. So we're seeing a good demand environment relative to both Fluke and TAC. It's probably even, it could be even better. matter if we were delivering at the on-time delivery rate that we typically do, which is in the high 90s. So I think in general, as I sort of said to Julian's question as well, we're seeing good demand on the demand front, and I think we're seeing that in some of our channel partners' external comments. So we feel good about the demand environment. where we have distribution businesses on a global basis. Where we're delivering maybe a little bit better in Asia, we saw better sales out and we saw good sales in. So I think we feel confident about the level of activity that's going on with customers. We've got a lot of good innovation, as we highlighted in the prepared remarks in the quarter, and we have really accelerated innovation in 2022 at both Fluke and TAC, which we also think will have a nice impact.

Yeah, I mean, the question is really more about partition of inventory rather than build-up. And if the channel is really light, which I think it probably is. Yeah, it is. Yeah, that was an acceleration, which seems to be what people are focused on. My final question is around accruance. It was down again in 4Q. Where are we on this fast transition? And when do you think accruance will get back to revenue growth?

Yeah, I think number one, we called it out, and I should have probably answered that on the software numbers as well. We did have less days in the quarter, so where we have staff, we have a little bit of impact relative to less days. We think, you know, as we said in some of the guides, you know, some of the guides, we think, you know, the combination of Akron and Gordian, we sort of think about that. We've moved some businesses between the two on a four-year basis at low double digits. That's probably a little higher at Gordian. But we would see right now we'd see Akron in the mid to high single digits for 2022. So we had good ARR growth in the fourth quarter. So, yeah.

And that new level of growth can be a little bit more of a headwind than if we were converting a very large maintenance install base to fast. Continuing to invest in those high-growth opportunities. We talked about it in the prepared remarks. Workspace planning is an example. Our EMS product line, which grew 50%. percent in the year. So it's a combination. That's not our biggest product line, but over time at that growth rate, it inevitably takes over being a bigger part of the growth story. We'll see that starting to play out in 22 and 23 at a current.

Great. Thank you.

Thank you. Your next question comes from the line of Dean Dre with RBC Capital Markets. Your line is open.

Thank you. Good day, everyone.

Good afternoon, Dean.

Hey, welcome to Elena, and thank you all for reverting to the morning call slot. Much appreciated. Although I was concerned it might throw Jim's biorhythms off, but we'll just have to see. I appreciate right up front you sized the $50 million in revenue. That's all for everyone. Can you give any more specifics, either by product line? Is it semiconductor-related resins, customer readiness? Just maybe take us through what the actual blockages were.

Yeah, so I would say first, and first, given the fact that I've kind of been on the East Coast time for the better part of 20 years, this is a fine change. But we do listen. The frame that we've got at a time zone that's easier for all of you. I think, number one, we would think about that $50 million is about 70% supply chain. So think of the remaining piece of that as probably COVID-related more than we anticipated. And some of that is just kind of some of our service businesses and things like that that, you know, had a little bit of challenge in December of getting on site. So the 70% of supply chain. Let's break that down a little bit. The majority of that is at Fluke and Tektronix and a little bit at EMC. And I would say at Fluke and Tech, it really is about electronic components and some of the things I described in Andrew's question. Very much around a big portion of that is application-specific ICs. Those are technologies that are pretty much dedicated to what we do in our product lines, and the work we do, as I described before, is really the countermeasure to doing that. So I won't go into more detail on that since we already did. But another part of that is what we saw at EMC, and the EMC thing is pretty specific. to some specific supplier shortfalls, as well as some customer challenges that I would also say that, you know, has a little bit of – you might have seen this in other government – people who have government contracts on the commercial side and on the military side where – Customers have to come in to validate products before they get shipped. And we saw less activity at the end of the year just given COVID. So that's a swap of it. But the biggest bucket, the highest parietal bar, is really those supply chain issues we described at Fluke and Tech.

That's really helpful. And then just a follow-up question on Tektronix record backlog. Can you parse out how much of that is supply chain related, but also with all the semiconductor capacity involved, coming on, you would think that there'd be some demand there that might have also translated into the higher backlog. But are you able to differentiate between the two?

Yeah, I would say, Dean, I would say almost no amount of that backlog is customer driven from an inventory or buy ahead kind of standpoint. Maybe a little bit because we've been raising prices. So I'd say there's a little bit of backlogging as what I would call price increase But we limit the ability for customers to be able to do that in terms of weeks of supply. So there's some of it, but not a lot. It really is on the demand side. It's certainly on the semiconductor side. We're seeing great growth at Keithley. But we're also seeing it more broadly in some of the products that we designate for maybe industrial markets, some of the power strategies we've talked about. We're seeing some of the new innovation on the two series, some different probe categories, and we mentioned the prepared remarks, the new five series. We're seeing really good customer interest. um in those products hence our book the bill was was so strong so i i we really think the demand cycle for tech is certainly going to be strong in 22 and quite frankly as much as you can get early signs on this we think strong in 23 as well given those dynamics some of what you described and and also with the color i just provided it's all good to hear thank you thanks dean your next question comes from the line of scott davis

And Elena, welcome. Thanks, Scott. Thanks, Scott. I've got a couple things here.

But one kind of just a bigger picture, I suppose. But ASP, well, bigger picture it's not. ASP, your consumables are down. Is your total installed base of boxes higher today than base units higher today than when you bought it? Has that grown at all, Jim?

Yeah, I think we said we've had low single-digit compounded growth in installed Bates over the last several years. I think TS capital, terminal sterilization capital, is actually up mid-single-digit in the year.

So we've seen growth in installed Bates since we bought ASP, which is additional boxes in your terminology.

Okay. And then... Also, clarification, did you say when that backlog in PACSI is going to clear out? Is that something that's first half of the year?

We don't anticipate the backlog in PACSI, quite frankly, Dean, or sorry, Scott. We don't see it depleting at all this year. We have a really, really strong backlog at Pacific Scientific right now.

Okay.

And then last, just quickly, what is lean portfolio management? I know I don't recall hearing that term before.

Yeah, it's our new innovation tool. Historically, it really applies to both software and hardware. It's a new tool that we're deploying in every one of the businesses, and it really is sort of an accelerated product development tool. It's a set of tools that accelerates product development, manages the portfolio better in terms of how to look at early stage innovation as opposed to maybe being a little bit more focused on the next generation of things we do. I think it brings some new concepts around managing not only the things we've got to do in the next generation of things, but also bringing on some new things that really drive full incremental growth focused on new secular drivers. So over time, we should see better returns on our R&D investment. We should see accelerated core growth from those investments as well.

Okay. Good luck. Thank you.

Thanks, Scott. Your next question comes from the line of Jeff Sprague with Vertical Research Partners. Your line is open.

Hey, thanks. Good day, everybody. Hey, just a few loose ends here.

A lot of ground covered already. Just on price, the 2% number, was that Q4 or the year? And can you tell us how much price is embedded in your 2022 guide? Yeah, that was at Q4, the 2% overall in Q4-21. And for what we're thinking, what's embedded in our guide is about 2% for 2022. And on tax, are we in the process of normalizing to some higher level?

You know, the tax rate's been certainly on the low side here in the recent past. What's actually driving the increase, and should we expect it to move higher in future years?

Well, I think we came into the year thinking 14% is the right baseline for us, and I think that's pretty good. What drives it down in 2021 is some discrete items that came through, usually around some of the bigger transactions, even with the split from Danaher that are really hard to predict. We don't see any of those going forward, so normally we revert back to that 14%. What we don't have in here is anything about U.S. tax reform or changes, but what we do have is the international tax rate are going up in some countries, and there's a global minimum tax rate that's going up. So in 2022, you know, we actually end up with, you know, probably a 12 cent headwind, you know, and that's embedded in our guide. So the rate is 16%.

Yeah, so if the R&D tax credit gets renewed, extended, or whatever, we're likely coming down a couple hundred basis points on the tax rate. Is that right, Mark?

No, I think we anticipate that to get renewed. So that's not changing. It's really about what's going on internationally in tax rates. I'm sorry, just one other quick one. Jim, just back to accruant. Is there any, I don't know, disruption or dis-synergy going on as service channel comes in, you know, maybe mutual customers where, one plus one isn't equaling two. There's any color there.

Is that any part of the revenue pressure we're seeing at accruant?

Not in the quarter. I think what's embedded in – there could be some moving back and forth at this point right now. There's nothing dramatic that's anticipated, Jeff. I would say what we're seeing, though, is we are seeing those value – I mean, we're getting great visibility into the value propositions of each of those businesses. And I think we have a better sense of selling strategy. And, you know, I think we're in a very good place. We may see some – challenge between situations over time with customers, but nothing's anticipated from the size. And particularly some of the growth drivers, particularly about things like workspace management, no conflict whatsoever. that's really an independent strategy and product line that really resides at Occurrent. So I think we've got some good levers to pull in the Occurrent business, and obviously the broader opportunity that we have with Service Channel.

all around the things they do is really great.

And I think with the combination of what we do at Gordian and Accurrent and some of those overlaps is only going to continue to help us build a better position and value proposition for customers. Great. Thank you. Thanks.

Your next question comes from the line of Andy Kapolitz with Citigroup. Your line is open.

Good morning, everyone. Andy? Andy? Chuck, you gave some color on the regions, but can you elaborate as to why Europe was significantly worse than your other two geographies in terms of sales trends in Q4? And it seems like supply chain headwinds have been worse for some of your peers. So just curious as to what's going on for you in Europe. And then China seems to be holding up well for you. Can you talk a little bit more about your outlook for the key regions in 2022?

Yeah, I'll take it. Number one, on the Europe side, we really do have a comp issue in Inditech. You know, last year Inditech had really dramatic growth in the fourth quarter, and that was really a customer in Europe. So a little bit of a comp situation in Europe as it relates to, you know, what we typically see, Andy. You know, when we think about the globe and just kind of going around the world, we had, as you said – very good high-growth market growth in the quarter. We had very strong China growth, as we've had very strong China growth around the world all year. And we're really – Chuck and I did a review with all of our high-growth markets the other day, and quite frankly, we're really firing on all cylinders relative to the work that the businesses are doing in China. So we would anticipate continued good growth in China for the year. We think that high-growth markets continue to be good. I would say that plays out. We have a little bit of supply chain headwind outside of Asia simply because most of our supply base is in Asia for the businesses that have electronics. This is a hardware comment more than a software comment, obviously. But we do see, you know, we do see some impact both in Western Europe and in the U.S. simply because the logistics of getting components out of Asia and into the U.S. and into Europe to our factories, in many cases our factories, was a little slowed in the fourth quarter. That improves, I think, over time as some of these freight lanes, you know, get a little bit uncongested over time. So that gives you a broad swap. I would also say we'll see North America also improve significantly. A little bit of that elective impact in North America obviously had to do with the fact that ASP was strong outside of the United States and really had that elective impact mostly in ASP. So bringing all that back, supply chain improvements really help us globally, particularly in the U.S. and Europe as we go forward here. And, as I mentioned, relative to those, some of the activities that we're engaged in relative to improving the supply chain will obviously impact what I would call our developed markets in the U.S. and Europe probably more predominantly than anywhere else.

Thanks for that, Jim. And then, Chuck, you're going to relatively normal conversion for Florida, I think 105% for 2022. And I think you mentioned a little bit of counter-seasonal improvement in working capital in Q1. So maybe you could talk about your confidence that excess inventory is basically peaking now and will start to normalize as you go through the year. And then maybe you could give us the impact on cash generation if the R&D tax credit is not extended.

I'd probably have to come back to it on the R&D tax credit if it's not extended. That would be surprising, but potentially possible. I guess every time until it's renewed, we put that on there. So let me come in and our follow-up call, I'll have that number for you. From working capital, I think that what will happen here is as supply chain rolls out, we'll get more sales out and our inventory turns will improve. And as we talked about also things related to COVID, we expect that receivables come down. That will primarily suggest seeing that improvement in the first half. There's always puts and takes in our conversion ratio, you know, about what can go on there. There's some things going on with the timing of tax payments there that are You know, we're talking 1% or 2% here that can go either way. But we'd expect normally we'd start off in Q1 with, you know, a 50% or 60% conversion. It accelerates through the year as the last couple of years. We're probably a little bit ahead of that in Q1, but it won't get over 100% until probably the second quarter and into the second half. Appreciate it, Chuck. Thanks.

So I know we're coming up with a few minutes short on the hour, so if we can take our final questions, Josh.

Your last question comes from the line of John Walsh with Credit Suisse. Your line is open. Hi there, everyone.

Maybe just a couple of two cleanups. One, I don't think I heard you talk about kind of the multiples you're seeing in your pipeline are some of the private multiples resetting like we're seeing in the public markets, or what does that look like in terms of something maybe breaking free here?

Yeah, John, you know, we always say the funnel is good, and I would say that that's very true. We remain busy. You know, the private market tends to lag a couple of quarters here from what you see in the public market. You know, they go through all the cycles of denial and things like that. So I suspect we'll, you know, as we look at things and, you know, as we continue to be disciplined about what we look at, we will take that into account as we look at things. knowing that, you know, potentially it takes a little while for that to occur. And I would say, you know, we feel very good about the two deals we've done over the last few months with Service Channel and then Probation Closing at the end of the year. So lots to do with those two businesses to really, you know, take and help those businesses continue to – they're a great business. We've brought great businesses. We've got great opportunity there. So we're spending, you know, we're spending time on making sure they become a – And we remain disciplined, and we'll watch these private transactions. But I do think it will be a couple of quarters before those valuations start to see themselves hit in the private market.

Great. And then maybe just a follow-on to this microcontroller supply chain question. You know, how much of your sales ramp through the year do you kind of already have commitments from suppliers that you at least on paper have access to those components that you need versus how much actually needs the supply chain to get healthier as we go through the year.

Well, I think, as I said, it's a bit of a, you know, there's lots of things going on. We have letters from suppliers very often, and then they fall down on those. So we're going to make more of our own luck here as we go forward relative to redesigning, requalifying, those kinds of things. And I anticipate with the strong backlog we have, what we put in the guide is a level of confidence with the things we've got. But it is a little bit of hand-to-hand combat every day on what happens and people, where they stand on commitments. I think it's been well documented, the capacity challenges and some of the challenges that exist within the semiconductor industry, and more broadly, just the electronic component industry, because it's not just semiconductors. We'll continue to prevail. I think when you look at our maybe batting average on actions, it continues to improve through the year. And we expect it to continue as these countermeasures work. But certainly as we think about things getting better, we don't have a belief that it dramatically gets better. What we really see is the benefit of the actions that we've been taking, a higher probability of those actions really taking place as we get through the year.

Great. Thanks for taking the questions. Thanks, John.

Yeah, that concludes our call. Jim, do you have any final thoughts?

Yeah, so thanks, everyone, for the time. Hopefully this time works better for you, and this process works well for your time frame. I know you're an incredibly busy day and a busy time of the season. We appreciate the time and energy that you put into spending time spending some time with us. Obviously, we're available for follow-up calls. I think what you see in the year, hopefully, you got a sense of. Certainly, there were a number of things and challenges in the fourth quarter. I come back to the 9.5% core growth we had for the year, the great margin expansion that we've had over a couple of years, and quite frankly, over a two-year basis, the strong free cash flow that we've continued to demonstrate. We walk into 22, a lot of our strategy playing out in terms of health care, a lot of our strategy playing out in software, as we described. And I think a lot of the actions we're taking to take advantage of the innovation that we've put in some of our hardware businesses, particularly at Fluke and Tech and within sensing. So we're incredibly... I look forward to being in the position we're in. The world is not without its challenges. We certainly think we are well positioned to take advantage of those as we move through the year. We look forward to the continued follow-up and conversations with you, and hopefully we'll get a chance to see you in person here sometime in the next few months. Thanks, and have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.