Fortive Corp Q2 2026 earnings call

Thank you, and thank you everyone for joining us on today's call. I am joined today by Olumide Soroye, Fortive's President and CEO, Mark Okerstrom, Fortive's CFO. During today's call, we present certain non-GAAP financial measures. Information required by Regulation G is available on the investors section of our website at fortive.com. We will also 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, actual results might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K and the subsequent quarterly reports on Form 10-Q.

These forward-looking statements speak only as of the date that they are made, we do not assume any obligation to update any forward-looking statements. Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. Our results and outlook discussed today are on a continuing operations basis. With that, I'll turn the call over to Olumide.

Thank you, Christina, and thank you all for joining our call today. Let me begin on slide three. Q2 marked another quarter of strong results and execution of the Fortive Accelerated strategy by our Fortive team. Four key messages from the quarter. First, our teams delivered strong financial performance across both segments. On a consolidated basis, we delivered core revenue growth of 6.7%, adjusted EBITDA growth of 12%, and adjusted EPS growth of 28%. Importantly, our results reflect continued progress on our objective of driving faster profitable organic growth powered by our Fortive Business System Amplified. Second, we remain disciplined in our capital allocation approach with relentless focus on optimizing shareholder returns over the medium to long term.

This quarter, we executed a small bolt-on acquisition and deployed another roughly $200 million to share repurchases, bringing total share repurchases since our launch of New Fortive a year ago to approximately 38 million shares or 11% of shares outstanding. Third, we continued to execute our Fortive Accelerated strategy, we are pleased to see evidence that our investments in innovation, commercial, and recurring customer value are contributing to accelerating growth, margin expansion, and earnings performance, reinforcing our confidence in our medium-term financial framework and value creation opportunity. Finally, we are raising our full-year 2026 adjusted EPS guidance to $2.95-$3.05, reflecting our solid first-half performance and our confidence in the trajectory of the business. Moving to slide four. Let me highlight some of the progress we are making in executing the three pillars of our Fortive Accelerated strategy. Starting with the first pillar, delivering faster profitable organic growth.

Overall, we remain encouraged by the progress we're seeing across innovation, commercial, and recurring customer value, all of which are building the foundation for durable, faster organic growth. This quarter, our accelerating innovation velocity again translated into faster growth. At Fluke, our innovation funnel is steadily expanding with new product introductions tightly aligned to strategic growth areas such as data centers, defense, and early-in-career technicians. Demand for CertiFiber Max continues to exceed expectations, helping establish Fluke's position in the rapidly growing data center commissioning and maintenance market and driving pull-through of the broader Fluke portfolio into this high-growth area. In Facilities and Asset Lifecycle Solutions, we are expanding our AI-enabled predictive maintenance portfolio, our ServiceChannel, and Accruent, including tools that help field service technicians diagnose and fix issues more accurately in the field.

At Gordian, our Flash AI solution, launched in Q1, is now in production across many of our strategic accounts and running well above plan, cutting construction cost estimating time from days to minutes and creating measurable value for customers and for Gordian. In healthcare, ASP received FDA clearance for our 50 lbs expanded STERRAD load capacity, further strengthening our position in robotic-assisted surgery applications, one of the faster-growing areas within the operating room environment. On the commercial side, we maintained our focus on faster-growing end markets and regions where we've made deliberate targeted investments to capture growth. At Fluke, investments in data center expertise drove incremental demand for our networks, power quality, and battery testing product lines. Additionally, we continue to see strong momentum in India, where our localized service and support investments are strengthening customer relationships and helping drive growth.

ServiceChannel is investing in commercial and marketing resources across Europe to capture the meaningful international opportunity in the business. At Gordian, our investment in growing contractor engagement is reinforcing the competitive differentiation of our two-sided procurement marketplace. In healthcare, we continue to deepen our engagement with enterprise health systems and ambulatory surgical center networks through coordinated commercial efforts across ASP, Censis, and our other Advanced Healthcare Solutions operating brands. On our recurring customer value initiatives, we made further progress on deepening customer life cycle engagement and improving revenue durability. In Q2, recurring revenue growth remained strong across both segments. At Fluke, recurring revenue growth was driven by strong performance in services and software offerings. Early customer feedback on AI-enabled capabilities recently introduced within Fluke's eMaint platform has been very encouraging. ASP consumables and services had another quarter of strong growth, with solid growth contributions from every major region.

Moving to the second pillar, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. Consistent with our priorities, we deployed another roughly $200 million to share repurchases in Q2. Since the spin-off, we have deployed nearly $2 billion to share repurchases, representing 38 million shares or approximately 11% of diluted shares outstanding. Our revamped bolt-on M&A engine and team is now in place, we are continually evaluating opportunities for high-quality, accretive bolt-on acquisitions that meet our rigorous strategic and financial criteria. This quarter, we completed the acquisition of a majority stake in UV Smart, an innovative company whose complementary UVC high-level disinfection technology expands ASP's portfolio and enables more efficient disinfection of specialized instruments.

Looking forward, our capital allocation priorities remain clear: invest in organic growth, pursue bolt-on M&A where risk-adjusted returns exceed other uses of capital, return capital through share repurchases, and maintain a modest growing dividend, all with a focus on best relative returns and maximizing medium to long-term shareholder value. Moving to our final pillar, building and maintaining investor trust. We are pleased to deliver strong performance ahead of expectations for a fourth consecutive quarter as New Fortive. We remain laser-focused on executing against our 2026 financial and strategic plan and continue to have strong confidence in our medium-term financial framework that we shared at our last Investor Day. With that, I'll turn it over to Mark to walk through our financial results for the second quarter in more detail.

Thanks, Olumide. I'll begin with slide five. In the second quarter, we delivered total revenue of nearly $1.1 billion, up almost 8% year-over-year on a reported basis, and up 6.7% on a core basis. We were pleased to see price and volume growth again in both segments, with results driven by healthy customer demand and strong commercial and operational execution across the portfolio. Software-related revenue remained a meaningful contributor to growth in the quarter, reflecting the underlying strength of our businesses and robust customer demand for our increasingly AI-driven new product releases. Regarding core growth by geography, North America saw a modest sequential acceleration in Q2 and continues to be our strongest performing region. Revenue in the Europe, Middle East, and Africa region declined modestly due to macroeconomic uncertainty associated with heightened geopolitical tensions and continued economic softness across the region.

Pressure in EMEA was more than offset by year-over-year growth and sequential acceleration in APAC and LATAM, driven by strong demand for professional instrumentation and healthcare consumables. Adjusted gross margin was 63% in the quarter, down approximately 100 basis points year-over-year. Adjusted gross margin performance was primarily driven by product mix dynamics resulting from outsized growth in certain lower-margin products, partially offset by operating leverage. Note that tariffs had a minimal impact this quarter as the prior year Q2 also reflected tariff-related costs for most of the period. Q2 adjusted EBITDA was $323 million, up 12% year-over-year. This strong performance was driven by adjusted gross profit growth, operating leverage, and discrete structural cost savings, partially offset by growth investments to support our Fortive Accelerated strategy. Adjusted EBITDA margin in the quarter expanded by approximately 110 basis points year-over-year to 29.5%.

We delivered adjusted earnings per share of $0.74 in Q2, up over 28% year-over-year, marking our fourth consecutive quarter of double-digit adjusted EPS growth. Strong adjusted EPS performance in Q2 was driven by growth in adjusted EBITDA and the positive year-over-year impact of share repurchases. We generated roughly $270 million of free cash flow in the second quarter, with our trailing 12-month free cash flow topping $1 billion with conversion on net income well north of 100%. Please note that during the quarter, we recognized a $4.5 million IEEPA tariff refund benefit in GAAP earnings. We expect another roughly $20 million-$25 million of tariff refunds in the coming quarters. To help investors more easily compare results across periods, we exclude the impact of IEEPA tariff refunds from our adjusted metrics and expect to continue doing so going forward.

The cash benefit is very real and will be deployed using our disciplined capital allocation framework. Moving to our segment results, starting with Intelligent Operating Solutions on slide six. Revenue for the segment grew about 9% on a reported basis, with core revenue growth of 7.4%, and we are pleased to see broad momentum continue across the segment. Core growth was driven by both price and volume, reflecting solid performance across professional instrumentation, Facilities and Asset Lifecycle solutions, and gas detection products. At Fluke, order volume remained strong, with order growth modestly outpacing revenue growth during the quarter. Customer demand continues to be robust across our industry-leading portfolio and across a broad set of geographies. Our Fluke team executed with discipline across the board while increasing investments aimed at further tapping into key high-growth end markets, including data centers and defense.

North America remained our strongest growth driver, with broad-based contributions across product lines. While performance in Europe was affected by macroeconomic uncertainty, this was more than offset by strong growth in APAC and LATAM, where increased commercial investments in strategic growth markets are yielding promising early results. Growth in Facilities and Asset Lifecycle solutions was strong again in Q2, led by strong performance in multi-site facility maintenance and marketplace software in North America. We continue to see evidence that our commercial and innovation investments are driving increased demand for our increasingly AI-enhanced products. Our gas detection business is growing nicely, buoyed by strong demand for our hardware-as-a-service product line in North America, the Middle East, and in Latin America.

Adjusted gross margin in the segment was just over 65%, down about 100 basis points year-over-year, primarily due to strong growth for some of our lower-margin products serving multi-site retail customers, partially offset by operating leverage. Q2 adjusted EBITDA in the segment grew 12% to $264 million, driven by adjusted gross profit growth, operating leverage, and discrete structural cost savings, partially offset by growth investments. Adjusted EBITDA margin for Q2 expanded by about 100 basis points year-over-year to just under 35%. Moving to our Advanced Healthcare Solutions segment on slide seven, we delivered total revenue of nearly $340 million. Revenue grew 6% year-over-year and 5.3% on a core basis. Q2 growth was driven by solid demand for healthcare consumables, services, and software in Latin America, APAC, and North America.

Our software products in the segment continued to deliver strong growth, driven by effective execution and strong provider demand for our gastrointestinal case documentation solution. Low-temperature sterilization capital demand improved modestly again in Q2 and contributed to growth. Adjusted gross margin in the segment was roughly 58%, down about 110 basis points year-over-year, reflecting product mix dynamics and strategic growth investments, partially offset by operating leverage. Q2 adjusted EBITDA in the segment was $88 million, up approximately 3% year-over-year, driven by adjusted gross profit growth, operating leverage, and discrete structural cost savings, partially offset by growth investments. Adjusted EBITDA margin contracted by about 80 basis points year-over-year, while remaining a healthy 26%. Turning to slide eight. Our balance sheet remains strong. We finished the quarter at 2.7x gross debt to adjusted EBITDA, modestly delevering from last quarter.

As noted earlier, we deployed roughly $200 million to share repurchases in the second quarter, reflecting our continued focus on deploying capital with a laser focus on driving best relative risk-adjusted returns and confidence in our ability to deliver on our value creation plan. As a result, we had approximately 307 million diluted shares outstanding at the end of Q2. In terms of M&A, we completed the acquisition of a majority stake in UV Smart towards the end of Q2, and the execution of our value creation plans for the two small bolt-on acquisitions we completed in Q4 of last year are both going according to plan. We continue to evaluate high-quality, accretive bolt-on deals that meet our rigorous strategic and financial criteria and deliver superior returns relative to alternative uses of capital. We now have the team and processes in place to execute effectively on our M&A strategy.

We have a healthy balance sheet and a growing business with high durability, strong margins, low capital intensity, and very attractive free cash flow generation characteristics. All of this gives us ample capacity to execute on our capital allocation priorities with a relentless focus on optimizing shareholder returns over the medium to long term. Moving to slide nine. We are raising our full year 2026 adjusted EPS guidance range to $2.95-$3.05, reflecting solid first half performance and confidence in the trajectory of the business. This outlook assumes a continuation of the market dynamics we experienced in Q2 and reflects current tariff rates. Let me provide some additional considerations to assist with modeling. Based on current foreign exchange rates, we now expect full-year reported revenue of approximately $4.35 billion.

Given solid performance to date, we now expect full-year core growth of approximately 4%, up from our prior expectation of 2%-3%. In terms of the shape of the balance of the year, we expect Q3 reported revenue as a percent of total to be broadly in line with historical patterns, while Q4 will be a smaller than usual percentage due to there being four fewer selling days in the quarter versus prior year. As we mentioned last quarter, this will also drive about a $15 million-$20 million headwind to reported revenue and a 150 basis point headwind to core growth in Q4. We expect FX and M&A combined to be about a 50 basis point tailwind to reported revenue in each of Q3 and Q4.

We are expecting Q3 adjusted EBITDA margins to be slightly below Q2 levels, driven by slightly lower revenue on an absolute basis and the impact of modest strategic growth investments. On a year-over-year basis, EBITDA margin trends will also be impacted by a more difficult Q3 OpEx comparable. We now expect a Q3 effective tax rate in the mid-teens and Q4 in the low double-digit range, and full-year net interest expense of about $140 million. From a bottom-line perspective, as we look forward to the balance of the year, as has historically been the case, we expect adjusted EPS delivery to be weighted towards the fourth quarter, with Q3 EPS up very slightly year-over-year, as we said last quarter, broadly consistent with what we saw in the first quarter of this year.

As the balance of the year unfolds, we continue to execute on our Fortive Accelerated strategy, quarterly phasing may evolve. As a final note, before turning it back to Olumide for closing remarks and Q&A, our first half results reinforce our confidence in the Fortive Accelerated strategy and the financial framework we outlined at our last Investor Day. We remain focused on delivering benchmark-beating returns for our shareholders. I'll now turn it back over to Olumide.

Thanks, Mark. Let me close with a few observations on the quarter and where we are headed. Q2 represented another strong quarter of performance. We delivered 6.7% core growth, approximately 12% adjusted EBITDA growth, and 28% adjusted EPS growth, our fourth consecutive quarter of delivering double-digit adjusted EPS growth and exceeding expectations. One year after our launch of New Fortive, we are generating momentum from our Fortive Accelerated strategy, and our confidence in the 2026-2027 financial framework we outlined at our last Investor Day is fully intact. We are pleased with the progress we have made. We believe we are still in the early stages of realizing Fortive's full potential. We are excited about the value creation runway ahead of us.

I want to thank our customers for placing their trust in us every day, and all our Fortive team members around the world for their commitment to our shared purpose of innovating essential technologies to keep our world safe and productive. With that, I'll turn it back to Christina to open the call for questions.

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