Q1 2025 Earnings Call Transcript

My name is Brock, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's First Quarter 2025 Earning 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. [Operator Instructions] I would now like to turn the conference over to Ms.

Elena Rosman, Vice President of Investor Relations. Ms. Rosman, you may begin your conference.

Thank you, Brock, and thank you, everyone, for joining us on today's call. I am joined today by Jim Lico, our President and CEO, and we are thrilled to welcome Mark Okerstrom, our new CFO, to the call. As he is in the process of ramping up, Jim and I will be addressing most of your questions today. We're confident Mark will also share some valuable insights and look forward to you getting to know him in the weeks and months ahead.

We present certain non-GAAP financial measures on today's call. Information required by Regulation G is available on the Investors section of our website at fortive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. 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 may 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 for the year ended December 31, 2024, and quarterly report on Form 10-Q for the quarter ended March 28, 2025. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update. With that, I'd like to turn the call over to Jim.

Thanks, Elena. Hello, everyone, and thanks for joining us. I'll begin on Slide 3. Fortive delivered a solid first quarter performance with strong operational execution, allowing us to deliver adjusted earnings per share of $0.85, in line with our expectations. Despite slightly lower-than-expected revenues, we expanded both adjusted gross and operating margins while continuing to invest for growth.

Our operating performance and disciplined working capital management drove better-than-expected cash flow generation in the quarter. We also continued our pace of share repurchases, reflecting our commitment to value-enhancing capital deployment. These results were achieved amidst a more dynamic macro environment and demonstrate our team's dedication to the Fortive Business System and relentless focus on execution. Our accelerated pace of innovation and durable recurring revenue profile is helping to sustain top line momentum in our Intelligent Operating Solutions and Advanced Healthcare Solutions segments for what will be new Fortive.

We saw customers in Precision Technologies or what we'll call Ralliant delay investments in light of increased political and macroeconomic uncertainty, putting a halt to the momentum we had seen in the second half of 2024. We came into 2025 knowing it was going to be a year of uncertainty, and we would need to stay flexible to adapt to changing market dynamics. Our outlook now incorporates moderating demand in PT as well as the net impact of current tariffs. Regarding the newly announced tariffs, we are deploying countermeasures using the playbook we started back in 2018. We've been on a multiyear journey to enhance our supply chain and manufacturing resilience, enabling us to reduce our exposure to imports from China by 70% since that time.

Lastly, we continue to make progress towards the separation, which we're targeting to complete by the end of the second quarter. In March, we announced our new CFO, Mark Okerstrom. His expertise in accelerating profitable growth and being a disciplined capital allocator will help drive additional shareholder value as we transition into the next chapter of Fortive. He spent the last month in immersion and getting up to speed, and we're excited to have him with us on today's call.

I'll turn it over to Mark to say a few words.

Thanks, Jim. Hi, everyone. Great to be here. I thought I'd start with a few brief remarks on my thesis for joining Fortive and some very early reflections on what I've seen so far after just over a month on the job.

Firstly, I've long admired the principles and practices behind the rigor that runs through Fortive's DNA by virtue of its heritage and its leadership, but I wanted to experience it close up. And so far, based on what I've seen it's impressive. FBS is real and the entire Fortive team here lives and breathes it with remarkable discipline. Secondly, and with my investor hat on, I felt the stand-alone Fortive investment thesis was compelling.

I was attracted by Fortive's strong portfolio of leading businesses with big moats and the secular tailwinds blowing at their backs in the markets in which they operate. I also like the near-term catalyst of the spin. Thirdly, to add to that base thesis I saw the personal opportunity to drive big impact and bend the returns curve up and to the right using levers that are largely in the CFO's hands. I was compelled by the opportunity to work alongside Jim for a few months and then with Olumide to find creative ways over the long term to accelerate organic growth across the business, while maintaining the financial discipline that Fortive has come to be known for.

And during my diligence work prior to joining, I also saw some real opportunities to unlock value in how we allocate the precious capital entrusted to us by our shareholders and how we work with our investor base. It's been just over a month and though it's early days, my thesis on Fortive remains well intact. I'm looking forward to meeting many of you in the coming weeks and months as I get on the road and at our Investor Day in New York on June 10. With that, I'll turn it back to Jim.

Thanks Mark. With that, let's take a closer look at our first quarter results on Slide 4. Core revenue declined 2% in the quarter, slightly below our expectations. FX was a modest headwind, resulting in total revenue down 3%. Intelligent Operating Solutions and Advanced Healthcare Solutions came in as expected with core growth up 2.2%, which was more than offset by an 8.4% core decline in Precision Technologies.

While trade and macro uncertainty is delaying the recovery in PT, we had overall orders growth with continued strength in secular growth markets. We delivered adjusted operating profit of $373 million and adjusted operating margin expansion of 20 basis points, led by performance in IOS, including accretive software growth and the benefits of our productivity actions. Adjusted EPS grew 2% year-over-year to $0.85, up 13% on a 2-year stack and we delivered better-than-expected adjusted free cash flow of $222 million. As a reminder, our 6-month growth in adjusted free cash flow was up 7%, reflecting our strong finish in Q4. We repurchased 2.5 million shares in the first quarter as planned.

Moving to Slide 5, I will provide more detail on our segment performance for the quarter beginning with new Fortive. On a combined basis, core revenue grew 2.2% in line with our expectations of low-single-digit core growth, despite the roughly 200 basis point headwind from Fluke-related sales that moved into Q4 and fewer days in Q1 impacting consumable and services utilization rates. Adjusted operating profit margins expanded 80 basis points, while continuing to invest for growth, highlighting the attractive incrementals of this business. Moving to the right.

Intelligent Operating Solutions grew core revenues by 2%. Fluke was up low-single digit as expected in the quarter. We saw stable industrial demand particularly in North America with a more challenging macro environment in Europe and China. New product momentum in our high-growth market segments provided a tailwind to growth, including our solar and EV storage equipment commercialization efforts in addition to successful new data center product launches with LinkIQ.

Combined with continued growth in software and services, this contributed to Fluke's durability in the quarter. Our Facilities and Asset Lifecycle group grew core revenue mid-single digit, driven by strong take rate revenue across our multisite retail product offering, partially offset by certain government customers, curtailing spending as they navigate budget and policy changes. ServiceChannel is seeing traction on its slate of new products and enhancements in addition to increased demand for fully outsourced solutions, including an enterprise win with a large specialty discount retailer in the quarter.

IOS segment adjusted operating margins expanded by 150 basis points in the quarter and over 300 basis points on a 2-year stack, enabled by continued accretive growth in our software and recurring revenue businesses. As you can see on the far right of the page, Advanced Healthcare Solutions grew core revenues by 2.5% in the quarter. After adjusting for the impact of fewer days in health care consumables, our infection prevention business grew mid-single digit, reflecting stable demand and continued traction in our new product introductions at ASP incentives. We continue to see strong win rates through expanded use of FBS sales and marketing tools.

We also saw a robust software growth at Provation, driven by continued share gains in SaaS conversions as large networks and health systems with disparate GI solutions look to consolidate and standardize platforms and cloud adoption continues to gain momentum. Positive volume leverage and accretive software mix were more than offset by growth investments, unfavorable FX and the impact of two less days, resulting in 70 basis points of adjusted operating margin contraction. Adjusted operating margins were up approximately 125 basis points on a two-year stack. Overall, IOS and AHS Q1 performance reinforces the durable and profitable growth profile at New Fortive.

Turning to Slide 6, the Precision Technologies segment. Going forward and consistent with how you'll see it represented in the published Form 10, Ralliant will report in two segments: Test and Measurement, which includes Tektronix and recently acquired EA, and Sensors and Safety Systems, which includes the Sensing Technologies and PacSci EMC businesses. For these purposes, we will refer to the new segment names. However, it is important to note this segment's results will differ from the presentation in the Form 10, which was prepared on a stand-alone carve-out basis and excludes approximately $80 million of annual Fluke-related service solutions revenue that is currently reported in the PT segment and will stay in Fortive going forward.

On a segment basis, PT core revenue declined 8.4%, below our expectations of mid-single-digit decline, driven by lower-than-expected orders in Test and Measurement and shipment delays in Sensors and Safety Systems. Test and Measurement core revenue declined by high teens in the quarter. Order momentum we saw in Q3 and Q4 of 2024 significantly slowed in Q1 as certain customers delayed orders due to increased policy and macro uncertainty. We saw further slowing in China and a significant decline in Western Europe, with weaker EV battery production and delayed semiconductor capacity expansion.

This is being partially offset by continued strong demand in communications for high-performance computers and high-bandwidth memory, both tied to the growth in AI data centers. Sensors and Safety Systems saw continued robust demand in the utility sector for grid monitoring and in the defense sector for energetic materials with strong orders growth in both businesses. Record demand levels continue to pressure supply chain, increasing our backlog in the quarter. Overall, Sensors and Safety Systems had low-single-digit core growth, reflecting a continuation of the broad industrial recovery we saw in the second half of last year, partially offset by supply chain constraints and delays in government approvals curtailing defense-related shipments.

We expect accelerated growth in this segment as we move through the rest of the year. Adjusted operating profit margins contracted by 260 basis points on lower test and measurement volumes, unfavorable mix and FX, partially offset by strong margin expansion at Sensors and Safety Systems. Turning to Slide 7. Policy and trade landscape has evolved significantly in the past 30 days. We came into this year planning for a number of scenarios.

We have taken several steps to mitigate the impact of tariffs across our portfolio. Since 2018, we started shifting to more of an in-region, for-region manufacturing and sourcing strategy, which reduced our exposure to imports from China by 70%. Coupled with our resilient market positions, including recurring software and services revenue, strong U.S. manufacturing footprint and reduced reliance on China, we believe we are well positioned to navigate the current environment. We estimate the gross tariff impact is in the range of $190 million to $220 million prior to our mitigation efforts.

This is primarily from China as you can see on the left-hand side of the chart. We have assumed the tariffs that are in place now or are expected to go into effect on July 9 continue through the year. Total impact breaks down roughly 60-40 between New Fortive and Ralliant. Moving to our countermeasures.

We have a proven playbook powered by the Fortive Business System, enabling us to move quickly to offset these headwinds. First, we are taking a strategic approach to pricing and have begun deploying price increases where appropriate. With industry-leading brands, we are collaborating with our distribution partners and customers. Coupled with our FBS pricing tools, we are quickly testing, refining and adapting to the current environment.

We are also continuing to optimize sourcing and logistics to rebalance regional flows and are making select investments to localize manufacturing, which will further mitigate the headwinds over the medium term. We expect our mitigation plans to phase in over the course of the second quarter. Coupled with other productivity and cost actions, we expect to fully offset the estimated tariff exposure by the fourth quarter of 2025 and be neutral in 2026. As a reminder, we mitigated unprecedented supply chain challenges in the last few years while still expanding free cash flow margins by leveraging FBS tools to improve profitability and reduce working capital.

We are utilizing the same playbook to problem solve and are confident in our ability to continue to deliver best-in-class net working capital performance. Moving to Slide 8 to talk about second quarter and full year guidance for total Fortive. We believe we've taken a pragmatic approach for the remainder of the year, adjusting our outlook to account for increased global uncertainty and the estimated impact of tariffs. Starting with the second quarter, adjusted EPS is expected in the range of $0.85 to $0.90, including a headwind from tariffs as our mitigation plans begin to ramp.

From a segment perspective, we expect IOS and AHS to continue a steady pace of growth and PT to see a modest improvement from Q1. Let's discuss what this means for the year. For clarity, our 2025 adjusted EPS range of $3.80 to $4 is all in, including the impact of tariffs, net of mitigation actions as well as underlying demand moderation in PT. We now expect PT core revenues to be down low single digit, again, assuming lower demand in Test and Measurement, partially offset by new price actions related to tariff mitigation. We are maintaining our core growth outlook for New Fortive, which includes a contingency for more muted demand that can impact pockets of IOS and AHS in 2025 as government customers navigate budget uncertainty as well as new price actions to countermeasure tariffs.

Our updated adjusted EPS guidance also assumes an incremental tailwind from FX rates as well as lower tax expense in the current environment. We expect to provide independent guidance for New Fortive and Reliant post separation on their respective second quarter earnings calls in July. Now on Slide 9. We've undertaken deliberate actions over the last several years to create a more resilient Fortive, including further diversifying our product portfolio, identifying and expanding into regions and growth markets. And FBS has contributed to our success, innovating in markets with strong secular tailwinds for growth with increased demand for safer, more efficient and more precise solutions globally.

We've increased our mix of recurring revenue businesses, which have compounded high single digit in the last five years. As a result, we've sustained continued revenue growth and margin resiliency in the face of a more dynamic macro environment. The progress continues. Today, Fortive is approximately 40% recurring revenue, which will expand to roughly 50% post separation and benefit from accretive software growth going forward.

We continue to expand our addressable markets with new product introductions like Fluke's solar and thermal imaging tools and ASP's steam monitoring products. Total revenue from high-growth markets outside of China are now greater than our share of revenue from China and is growing at high single-digit pace. Despite the delayed recovery we see in Precision Technologies, we have a diverse set of end markets with exposure to strong secular trends, and our consistent execution has resulted in differentiated double-digit adjusted earnings and free cash flow compounding over the last five years, demonstrating our ability to profitably evolve our portfolio to deliver in any environment.

Turning to Slide 10. I want to provide a brief update on our separation plans before wrapping up. We continue to make progress and now expect the transaction to be effective by the end of the second quarter. In terms of upcoming milestones, we anticipate filing the Form 10 with the SEC in the coming days, announce a CFO for Reliant and host Investor Day in New York on June 10. Investor Day will be both in person at the New York Stock Exchange and webcast live through our Investor Relations website. Fortive and Ryan led by Illumina and Tammy will present their respective businesses, management teams and priorities as 2 focused independent companies.

We will host an innovation showcase, highlighting our exciting pipeline of new products and solutions to help our customers solve their toughest challenges. I'm incredibly excited about the future and confident both companies will showcase their tailored growth and capital allocation strategies to drive investor returns and unlock their full potential in the years to come. I'll now wrap up on Slide 11. As previously announced, I'll be retiring as President and CEO following the completion of the Ralliant spin-off. And I'd be remiss if I didn't take this opportunity to thank our extraordinary 18,000 team members who helped shape and create a more resilient Fortive today.

Our greatest strength is the enduring passion and commitment of our teams who take great pride in how they show up with a deep belief in better every day. This next chapter is a manifestation of the strategy we laid out at our inception, profitably evolve our portfolio to deliver in any environment. Our enhanced portfolio positions, innovative new products and dedication to the Fortive Business System have allowed us to deliver consistent compounding performance in the last five years. As we navigate the more uncertain and dynamic year ahead, we are resolute in our commitment to supporting customers and delivering for shareholders.

Our performance in the first quarter underscores our relentless focus on execution and our updated outlook for 2025 reflects our proven playbook for navigating dynamic market conditions. We remain focused on finding opportunities to expand our leadership positions in the markets we serve, while protecting earnings and free cash flow resiliency. Looking ahead, we are diligently progressing toward the Investor Day on June 10, followed by the separation and successful launch of Ralliant. It's been an exciting nine years.

Thank you for your trust and partnership over the years and I look forward to seeing many of you in New York in June. With that I'll turn it to Elena.

Thanks, Jim. That concludes our formal comments. We are now ready for questions.

Thank you. We will now be conducting a question-and-answer session [Operator Instructions] Our first question today is from Scott Davis of Melius Research. Please proceed with your question.

Good. I guess morning out there. Jim, we hate to see you go. It's been a pleasure and a great nine years. I hope you enjoy retirement. Don't be a stranger.

Thanks Scott.

But I'll see you in June anyway. So look I just wanted to beat this horse a bit on tariffs just because it's been on every call. You mentioned localizing production. Just wanted to kind of explicitly understand what you mean by that. Are you talking about building out new capacity in the US? Or can you just modulate your capacity back to perhaps where it's needed?

Yes. Scott I think number one, as you know, we've been on this path over the last several years of derisking our supply gain and you've not seen any moderation or big increase in investment to do that. So we've done that in a way that's consistent with contract manufacturing and also current facilities. So we'll do that.

And I would say the plans are really much more of accelerating what we were planning to do than any – particularly as it relates to China exporting into the United States. A lot of that has been taken on since 2018, as I said in the prepared remarks and it's just something we'll accelerate here in the coming months.

Okay. Makes sense. And just wanted to ask on Test and Measurement. I mean it's one of the bigger declines I've seen in that business I can remember and we take a pretty deep recession to find anything comparable to that. But how much of that business has just been kind of pushed to the right versus perhaps some real air pockets in demand there?

Yes. I would say – well, it's a couple of things. One, if we think about it from a – coming into the year, we obviously saw good orders in the second half of the year in 2024. So that led us to think through that things were starting to improve. I think what we saw is very much what you said with just a lot more delaying.

Things stayed in the funnel in many respects but certainly the uncertainty. And it was really across geographies so it wasn't one particular geography. I would call it pretty consistent amongst all the geographies including North America. And it was really just customers deciding to take a pause.

As you know many of our customers are semiconductor and electronics players, who obviously the tariffs have a more measurable impact in many cases given the typical China content. And I think a lot of our customers are trying to assess their own mitigation strategies. And so we just thought it prudent to sort of assume that that stuff probably doesn't correct itself immediately. And that will continue to – it will get better through the year but it's not going to mitigate it anywhere dramatically like we thought.

And so maybe just back to first principles as you remember, we thought we would see some of those markets come back in the second half. We had a tough China comp in the first quarter as an example. And we just thought those markets would – assuming semiconductor would come back what we really said is hey, we think that recovery is probably pushed into 2026. So we'll continue to fight for every dollar. But we just thought it was prudent to sort of see what we – take what we saw in the first quarter and apply that to the remaining part of the year.

Makes sense. Thank you. I’ll pass it on.

Thanks, Scott.

The next question is from Steve Tusa of JPMorgan. Please proceed with your question.

Hi, Steve.

Hey, guys. How are you?

Great.

Thanks again for everything. I think we've been to this before but thanks and good luck in the future. I'm just trying to figure out why I guess like the Test and Measurement industry just seems to be having a bit more volatility in and around the end of the quarter, call it, maybe some preordering or pausing. We're not really seeing that in the rest of the economy.

What's your kind of take on why this particular vertical of devices is seeing this type of performance versus maybe the rest of the economy?

Well, I think a couple of things. One is if you think about its exposure. It's exposed to diversified electronics and semiconductors, a little bit back to the point I was talking about a second ago, which is these are investments that customers in many cases can delay because they're R&D. And so as some of the economic uncertainty has unfolded throughout the quarter, certainly as the tariff mitigation strategy that really started when the initial tariffs came out in the beginning of the year, customers have just taken a pause.

And so that's what we're seeing. We're not seeing cancellations. We don't do a lot in production test where it might be tied to a production cycle. We really do this in an R&D world for the most part.

And so it's easy for customers to continue to delay some of those decisions. I think as I said we started to see things getting better in the second half from an order perspective. But what we saw in the quarter was really people taking that pause. And I think that tends to be more related to other markets.

Maybe it is the exposure to semiconductor and electronics that's probably a piece. Also have the exposure to the government has a CapEx component to it, and it's just easy to delay for a quarter or so from an investment cycle. And a lot of our customers who are trying to deal with some of the uncertainty and tariff situations that are out there, are just -- they're not certain as to when their buying cycle will start again.

Okay. And did you -- in any other businesses like Fluke, did you see any kind of unusual buying behavior around the end of the quarter or kind of the end of April here? Anything unusual in those types of businesses the more industrial commercial type businesses?

Yes, it's interesting. Even at Tek the core industrial business at Tek was actually pretty good. It was flat but given where the other environments were I would say it was much better. So we've seen pretty good revenue in industrial sensing as an example.

As we said, the Sensing business was -- we had growth there in orders and growth in the business when you include stability and the rest is Sensing. So that's your industrial exposure. To your specific question around Fluke, Fluke was continues to demonstrate good resiliency. So we did see a little bit of buying in March but some of that had to do with various reasons.

You saw some of our customers come out today the WESCOs and Graingers of the world. And their numbers in many -- in some of the verticals that we play in were pretty good. So we think that's good. North American point-of-sale for Fluke was positive and it was actually in the mid to high-single-digit range whereas the rest of the world was sort of flattish.

So North America is driving Fluke for sure. But certainly what we've seen is a more durable Fluke over the last several years. And we would continue to expect to see that through the remaining part of the year.

Great. Thank a lot for the color, as always.

Yes. Thanks Steve.

The next question is from Julian Mitchell of Barclays. Please proceed with your question.

Hi, Julian.

Hi Jim. Thanks very much for the help, and I wish you well in retirement and also welcome to Mark. Maybe just wanted to start I suppose with Q2, because that's the last sort of full quarter of Fortive in its current condition. So just to understand the guide a little bit it's sort of embedding I think what maybe a low-single-digit sequential revenue increase in both New Fortive and Ralliant, and then maybe kind of flattish margins sequentially, because you've got a big tariff headwind.

Is that the right way to think about it that Q2 you get maybe I don't know $0.06 or something of the $0.10 tariff headwind that you guided for the year?

Hey Julian, this is Elena. On the outlook for Q2, we're assuming that New Fortive will continue to grow at the same pace call it low-single-digit. We've accounted for a bit more of the uncertainty in the macro environment in that expectation. We think that the Precision Technologies segment will still be down have a core decline call it maybe more like mid-single digit, but an improvement as you mentioned sequentially from Q1. And margins because of the impact of tariffs and our phasing in of countermeasures will be dilutive to the margin rate sequentially.

They'll then get better as we move through the back half of the year. But from an all-in sort of tariff net of countermeasures considering the phasing effect you're right it's probably in that $0.06 range for tariff.

That's great. Thanks very much. And then just my second quick follow-up would be around the Healthcare business. So you had some margin decline in the first quarter year-on-year with sales up.

I see the reference to FX and probably that effect goes away the balance of the year. But is that reinvestment element something that lasts all year that will weigh on the Healthcare margins or it's something specific in early in the year?

So Healthcare margins do typically start off lower in the first quarter. They do tend to ramp. We expect them to ramp sequentially throughout the year. Q4 is our highest margin rate quarter for Healthcare.

In the first quarter specifically, we did have some transactional FX headwinds. You've seen that before in the Healthcare segment. That did impact us. We wouldn't expect that.

We obviously don't forecast that obviously to reoccur. And from a growth investment perspective we are intending to continue the growth investments but still be able to grow margins both sequentially in Healthcare throughout the year.

Yeah. And Julian I would just say as we look through the year part of the impact in the quarter was those less days. Obviously high consumables are high margin fall through. So that's part of the story as well.

But we feel good about Healthcare margins. We should -- that's a good rate. If you equate for the FX and you equate for the consumables that's a good launch rate into the rest of the year. The team is doing a nice job.

The businesses that are profitable like Provation is doing well. So we feel good about the margin trajectory for Health for sure.

Great. Thank you.

Thank you.

The next question is from Joe Giordano of TD Cowen. Please proceed with your question.

Hi guys. How are you doing? Can I start on PT? Can you talk us through the -- like where they're manufacturing and how that compares to competition? Just wondering like as you adjust prices for tariffs there like is there any competitive imbalance versus a competitor that might be manufacturing in the United States?

Well, I would say we have manufacturing all over the world. This is why we can mitigate a number of the things that have impacted the business. So we've got manufacturing in the US. Obviously PT is a lot in that comment.

You take like EMC as an example all of its manufacturing is in the United States as an example. And that's -- they don't have much tariff impact because almost all their sales are in US.

I'm more talking Tek, I apologize for that.

Yeah. Okay. So broadly we've got options around the world for PT. Getting to Tek specifically we manufacture in Southeast Asia, China and in the United States, so we have flexibility in how we manufacture.

Our competitors manufacture all over the world as well sometimes in Southeast Asia for sure, but also in Europe. So we've been on a path to mitigate the changes that have occurred. Some of our -- when you look through the tariff page that we have, a number of the dollars that go from the US into China tend to be things that are IP-protected. So we'll most likely move that manufacturing into countries where we can continue to protect IP.

NATO countries as an example are one example of that type of strategy. So we're just going to accelerate as I said. We're going to accelerate the strategies that we already had on the books. In many cases we were doing that particularly at Tektronix.

Our supply chain and manufacturing strategy call it global moving manufacturing around the world really had to do with our product launches. So we were following the cadence of our product launches to protect, sort of, to minimize reinvestment if you will, but we'll accelerate that. We'll move resources around to do that. And we feel we can do that really effectively through the year.

And that's part of -- it's certainly part of the reason why we're confident we can mitigate the tariffs by the fourth quarter.

On AHS I mean I know there's a little bit of a couple of fewer days and that makes sense the comments you just made on the margins. But I think on the core growth side I doubt anyone had 2.5. Like was that below what you guys were thinking? Like I think the view was kind of comfortably in the mid-singles there. So if there's anything that's...

Yes, the number we knew was going to be low single based on when you add the days back you're in the mid single-digit range. I think we talked about that in the first quarter call. So certainly you lose that many days the math is pretty easy. So in that sense we feel like from the revenue perspective AHS came in right where we thought they would.

Okay. Thanks.

Thank you.

The next question is from Jeff Sprague of Vertical Research Partners. Please proceed with your question.

Hi. Thanks. Good day, everyone. Jim best of luck in whatever is next. Just coming back to tariffs and I'm sorry I was on a touch late and got dropped off the call. Is the number you're sharing with us today the annualized rate or the in-year rate? And can you just clarify how much of it you think you're offsetting in 2025?

The number is in the 2025 impact call it $200 million at the midpoint and we're assuming we're going to offset about 80% of it Jeff.

And then the US exports to China are those Fortive finished goods to Chinese customers where actually maybe that $90 million to $95 million isn't really a cost item but it's just sort of a demand destruction item? Can you just clarify that?

No it's manufactured product into -- that we make in the U.S. for Chinese customers. And we can mitigate -- we'll certainly mitigate those -- it's less than 2% of our revenue. So from a high bar pareto historically and as I said before it's also things that are maybe more IP-related or we have the core technology and the core manufacturing capability. But we can -- we certainly can mitigate a number of those things.

Some of that is things like Fluke calibration as an example. And we have manufacturing capacity outside of the US and outside of China in which to mitigate. So we certainly can action those things. So think of that number as a tariff number and not a demand destruction number though for purposes of your question.

And then also just some further clarification on what you're expecting here. Jim you mentioned July 9. Are you expecting that the tariffs that are on 90-day hold actually come back fully on July 9? Can you just clarify what you...

We are we are. We're pretty much saying hey everything that we know today is going to continue through the remaining part of the year.

So wouldn't the rest of the world so everything has got kind of a base 10 then right? I mean wouldn't those rest of world numbers actually be even more than that? Maybe it's de minimis?

No, no. They're at the higher number. They assume it goes up. We assume everything goes up. We don't assume -- this is the more conservative approach to it. It assumes that the mitigation that was announced the 90-day reprieve we assume that it goes back to the original rates.

So this $200 million this year assumes all-in the full-blown...

Exactly. Exactly But to be clear as you see the numbers it's mostly China. So that number if it were to go down it's not a tremendous tailwind in any way shape or form. And I would say the other thing is we're going to have a lot in Mexico.

So if anything happens from a Mexico perspective there was a lot of -- I know there's a lot of noise early on when the Mexico tariffs were first announced. We don't have any manufacturing in Mexico. So in many respects we think this is an all-in we certainly think this is an all-in number.

Great. I will leave it there. Thanks.

All right. Thanks, Jeff.

The next question is from Brad Hewitt of Wolfe Research. Please proceed with your question.

Hi. Good morning, guys. This is Brad Hewitt on for Nigel Coe.

Hi, Brad.

Hi, Brad.

Just curious if you could walk through your assumptions by segment both for Q2 and the back half of the year in terms of core growth and margins.

Brad, yes, I gave some overarching comments. We're not giving direct growth and margin guidance at this time given the changing effect of our tariff countermeasures which include a significant portion of that includes pricing. So just directionally we talked about Q2 New Fortive core growth low-single digit and the PT segment would be down call it mid single -digits. For the year we've assumed that New Fortive, no change in the core growth rate would be up low-single-digit plus to mid-single digit.

And the PT segment for the year would be down now low-single digits. So, down more than what we had planned them to be flat for the year initially. They'll now -- we now expect them to be down low-single-digits.

You should consider that really the change in the year is really in PT. Really what we're saying about New Fortive is a little bit of de-risking relative to sort of some of the government spending, but at the end of the day right to where we thought we'd be in what would now be called New Fortive.

And then maybe just on the margin side again I'll comment. We expect margins in the second quarter to be down sequentially from the first quarter. That reflects lower demand in PT as Jim just referenced as well as the effect of tariffs that are largely somewhat not offset by countermeasures by the second quarter. Moving into the second half though, we would expect margins to improve then sequentially.

And again historically, Q4 is our strongest margin quarter and that would be true across all of the segments.

Okay, that's helpful. And then you guys called out the mid-single-digit core growth in FAL in Q1. Just curious if you could break that down between the two businesses. And then within FAL, are you seeing any pockets of hesitancy from government customers? Thank you.

Yes. No, we had a good quarter in FAL led by ServiceChannel, one of the best NDR numbers I think we've seen in a while. So we feel good about what's going on in FAL. A little bit Gordian.

Gordian was good continued to come most of where we thought they'd be with a little bit of hesitation on some customers, but by and large the funnels remain good and strong. We'll see how state and local agencies play out in the second quarter. So, some of our muted view of what might happen in the second quarter if there's anything is we'll see how the second quarter is always a big quarter for Gordian. We'll see how that plays out.

So far so good in terms of what we've seen in the quarter. As an example procurement in the first quarter at Gordian was double-digits. So, we didn't see reluctance. We did see some -- in FAL in total, we saw some municipalities and government agencies with a little bit of uncertainty.

But I think the number we posted all up mid-single digit is a very strong number. And we feel good about the trajectory of the business for the remaining part of the year.

All right Thanks Jim.

Thank you.

The next question is from Andrew Obin of Bank of America. Please proceed with your question.

Hi, good afternoon. Good morning Jim. Thank you for all your help over the years. It's been a pleasure. Thanks so much.

Thank you.

Just to clarify so Tek orders were positive in the first quarter and you haven't seen things worsen in April, but you are assuming fewer deals in the pipeline convert in the rest of the year. Is that right? Just to clarify that.

Andrew, just to be clear, PT orders were positive in the quarter in the first quarter. And that really if you think about Test and Measurement down sort of high teens and Sensing and Systems up. So think about that.

Okay, got you. And just could you remind us just how is Tektronix different versus Keysight or Anritsu? Because I think Anritsu reported March quarter Keysight get it like a couple of months back but just there is a disconnect. What end market really differentiates you from the competitors? Just remind us.

Well, I think there's certainly a couple of things. One is we tend to be much more in the R&D lab, I would say. We're not as much comms when you think of telco comms, we certainly don't have exposure to that. The RF products and RF technologies less software tech as well particularly Keysight's got a little bit more software.

So, I would say those are definitely the differentiation different parts of the market. And I think some of it is -- can be answered by when we start to look at two-year stacks and things like that and how the backlog played out over the course of the last few years. As you get there you get closer to the -- the numbers are much more in line when you start to look at it from that perspective.

Really appreciate it. And just a follow-up on your footprint. So are you keeping CapEx and I know it's still for the combined entity and I know we're going to separate. But is the implication that the CapEx for 2025 staying flat, going up, going down when all is said and done with your actions? Thank you.

Yes, it will be flat. I mean I wouldn't think we -- first of all I think our ability to sort of keep CapEx low we tend to have a low CapEx model. We're mostly final assembly and test. So, there might be a little bit of movement of prioritization around CapEx.

It's really more that than anything else. But I think in terms of just how we think about relocating manufacturing, we'll do that with partners as well. That also keeps CapEx low. So, specific to CapEx, it's not going to be a needle-mover, certainly for the remaining part of the year, as we move the supply chains and move our manufacturing around.

Thanks so much. And we will see you next quarter.

Thanks Kevin. Yeah.

The next question is from Andy Kaplowitz of Citigroup. Please proceed with your question.

Good morning everyone. Jim thanks for your help. Mark welcome. Just -- I think Jim, …

Thanks Andy.

…you mentioned Sensors and Systems. You said increased backlog, but can you talk about the shipping delays you saw on the defense side? I think that's not necessarily a new phenomenon for you. So, what's the visibility you have to that improvement that I think you talked about in the second half of the year?

Yeah. We've had such record growth in that business that from quarter-to-quarter we get a little bit of movement, as you said. We're working off sort of record backlog in that business and record quarters. However, the issue in this month was really related to sort of some of the -- if we had any impact from a Dodge perspective, it was probably here.

In many cases, we need the U.S. government to validate and verify product before we ship it. And we just had a little bit more variation in that than we would normally see. And so, that was really the impact there. We feel good about the manufacturing capacity we're putting in that business.

The business is one of the better -- we have one of the better FBS teams there. They're certainly working through that. So, there's a lot that has been told about the supply chain of the Defense industry. A lot of our work is really building the supply chain resiliency while we build in the capacity that we're going to need to continue to deal with the record demand that will be in that business here for the next several years.

Very helpful. And then, Jim, I just want to dig into the sales by region for Fortive. I know prior to this quarter you already expected China to be down. What are you thinking now and what are you thinking for North America and Western Europe?

Yeah. I think North America is going to be good. It will be our best market, for sure. I would say if you were to just think about our growth in the quarter -- it was strong.

And it was strong across the board. North America consumables, as an example, at ASP, were very good. Excuse me. Our Asymmetry business was good.

So, we saw good healthcare in North America. Obviously, our software businesses are mostly in North America, so we were good. Fluke had a good North American number. I would say in New Fortive, we had a good North America number.

And we've continued to think for all of Fortive, North America will continue to be one of our better markets. I would say China -- we now think it’s probably, for all of Fortive, down high single for the year. That’s without thinking through how pricing and tariffs play through. But we do think that that's a little bit more challenged than we anticipated.

So, I would say China is going to be a tough market. Western Europe is tough. We had a really tough Western Europe market for PT. So I think, broadly, we're seeing some slowing in Western Europe.

What's embedded in the guide and everything we think about for both New Fortive and Ralliant going forward is really probably, North America being good, Western Europe being challenged -- more challenged on the Ralliant side and China being challenged. The rest of the high-growth market has been good. We had a good Latin America quarter. We think that will continue to be good.

We think a number of the other non-China high-growth markets -- as we've said in the prepared remarks -- that's bigger than China today and that will continue to get bigger with growth rates there. So those are places, quite frankly, that we're making some investments in places like India, as an example. So, we think those can continue and that will be the basis for which we built the guidance.

Appreciate the color.

Thanks Andy.

The next question is from Chris Snyder of Morgan Stanley. Please proceed with your question.

Thank you. I want..

Hi Chris.

Hey. How’s it going? Appreciate all the help and best of luck going forward. On the price-cost -- I think of the $200 million growth, you guys talked about 80% recovery.

So, I guess of that -- $160 million -- any way to think about how much of it is coming from price? How the price flows through and from like a cadence perspective in the coming quarters? And then when you guys talk about completely mitigating the tariffs in 2026, is that at a margin percentage level? Is that a dollar level?

Thank you.

Yeah, Chris, I’ll take your question. I know you were getting out there. I would say, number one, just from a tariff mitigation perspective, it will be on a dollar basis not on a percentage basis, simply because the amount of dollars that you have to offset is just with our gross margins, as an example is pretty dramatic. So we will see some gross margin and OP margin degradation.

Elena talked about that a few minutes ago. We'll see some of that as it plays out through the year. As Elena said, $0.06 to $0.07 related to tariff impact in the second quarter. We talked about $0.10 in total.

So that gives you -- fully mitigated. So that gives you a little bit of a sense of what the cadence probably looks like, our biggest impact in the second quarter, a little bit less in the third quarter, mitigated in the fourth quarter. That's on a dollar basis to reiterate that point. So that's how we think about it.

And relative to your question around price, about two-third price. Some of it will be surcharges but most of it will be true price and hence, some of the reasons why the second quarter doesn't have the mitigation. It takes a while to get some of those pricing actions in place, whether it's with channel partners or customers. We're certainly working through those pricing arrangements and that on a global basis that takes a little while to do.

So that's why the cadence is such. And we feel good about those actions, the combination of the strength of our brands, the strength of our innovation and technology really allows for some of this. And I think customers have understood that this is unfortunately one of the situations that comes with some of these tariffs.

Yeah. No, absolutely. I appreciate all of that color. And then maybe following up on Precision Tech. Could you provide an update on EA Elektro? I would imagine that turning organic here in Q1 led to some of the pressure on PT organic in the quarter. So any just color on how that business did in Q1? And then what does the guide assume for EA Elektro for the full year? Thank you.

Yes. I think number one, increasingly, as we probably think about it all as one as we continue to get closer just because of the order trade-off of Tek salespeople and EA salespeople. But you're certainly right. The toughest organic -- EA went organic in the first quarter, and the biggest headwind for that quarter is the first quarter.

So certainly, part of the headwind that we talked about in Test and Measurement is going to be that. We think that, that business is probably in the $20 million to $25 million range per quarter per year. And part of the Western Europe degradation that we talked about is really EV mobility investments on the part of European automakers. So we've embedded that in the guide that really means that while we thought we'd probably have mid-single-digit growth at EA for the year, we're probably closer to flattish.

We'll see how things play out, but we continue to see good traction on some of the things that we're doing in the funnel. But very much the uncertainty that I described more broadly about customers is certainly embedded in the auto customer base. You've certainly seen that this week with GM and GM's announcement this week in terms of how they're seeing things. So I think the global automotive business is challenged for sure from an investment perspective.

And we've been seeing that from investments on their part, and we would anticipate that, that continues through the remaining part of the year.

Yeah, absolutely. Appreciate all that prospective. Thank you.

Thank you.

The next question is from Deane Dray of RBC Capital Markets. Please proceed with your question.

Great. Thanks. Best of luck, Jim. You and I go way back to your Danaher days, so I appreciate it.

And welcome to Mark. My question is on, just given the headwinds at PT, I didn't hear anything about taking any cost out repositioning, given these headwinds. The FBS playbook would be to kind of try to manage decrementals in line with fall off in demand. I know, you've got a spin happening so maybe that complicates things.

But just can you address about any opportunity here to take some costs out?

Yes. We announced I think $20 million of restructuring at the beginning of the year, so we've done a bunch of proactive restructuring as well to get ready for that. And some of that impact will be -- gets better through the year for sure. We've taken a lot of other costs out to offset some of the decrementals.

Tek is one of our higher incremental businesses just because of the high gross margins and high standard margins in the business. And part of the tariff mitigation will be some realignment that does require a little bit of investment -- maintaining investments as well. So I think the team is managing very well and I think we're in a good place. So let's see how it plays out.

But first and foremost is getting some of this price in the marketplace, getting the tariffs mitigated, that's the first order. Now that's -- the more we can get -- the best levers we have in that business is to get pricing into the marketplace faster and to get the tariffs mitigated more quickly. Those actions will be more helpful than a little bit more restructuring. But certainly, I know Tammy and the team are certainly very rigorous in terms of how they think about investment and how they think about offsetting challenges and I'm confident that they'll continue to find ways to do that through the year.

Got it. And just a last quick one that was in the comment in the prepared remarks about growth investments. Can you size that? Where is it across the segments? And have you throttled any of those back?

Well, I would say the growth investments particularly on the New Fortive side have continued. I think we called it out on the Healthcare side in particular where we spent some money in R&D. I think one of the things you've seen from the Healthcare business particularly out of ASP here recently in the fourth quarter, we talked about a number of those 510(k) approvals that we got in the second half of last year. We're continuing to invest in a number of innovation fronts that will play out over the next year or so.

So, there's certainly some investments. I probably -- and there are some as well on the IOS side as well. So I'd characterize those growth movements more on the New Fortive front. Think about that in the $10-ish million range probably maybe a little bit more.

And you'll get -- I think you'll get some good color as to how that's going to play out when we get to Investor Day here in June.

Great. Thank you. Best of luck.

Thank you.

Our last question today will come from Andrew Buscaglia of BNP Paribas Asset Management. Please proceed with your question.

Hi, good morning everyone.

Hi Andrew.

I was hoping you guys can update us on some of the software trends you're seeing. It sounds like it's going well in Advanced Healthcare. Hard to sort of see it in the margins with the growth of investments. In IOS obviously, you can see it in the margins the last couple of years.

But we're seeing kind of conflicting comments when you look across the software industry. I'm not a software analyst, but you see some mix -- sort of mix trends. So I'm wondering, how are those businesses handling the tariff situation? And can you just talk about the latest you're seeing there?

Yes. I would say exceptionally the quick answer is, there's really not a tariff impact necessarily within our software businesses. As we mentioned in the prepared remarks, our Facility and Asset Lifecycle software businesses are performing well. There's some uncertainty, but I think the team has done a nice job of from an innovation perspective and a number of and really commercialization to really get after things.

And so I feel good about where we're at. We mentioned the strength of ServiceChannel is one example. On the Healthcare front, Provation and Censis both had good quarters. Provation in particular is doing very well.

So we -- that's a very high-margin business already. So I would say in general, we feel good about yes there's some puts and takes relative to some customers, but we got some nice we saw some nice -- we secured some nice large orders in the quarter in a number of places. So, yes, there's some uncertainty, but that's balanced with some of the innovation that we've done. And I think we're managing the businesses exceptionally well.

There's probably a little bit of upside that we haven't built in, which is if you sort of said what would happen if tariffs play through probably at Gordian, and a little bit of ServiceChannel where we have some pass-through business. If the tariffs were to raise the input costs there, we do see a benefit on the pass-through side. So we'll see how that plays out. It's still way too early days.

But we did see that in sort of the supply chain tariff era of a few years ago. So we'll see where that plays out. As I mentioned, way too early to tell. That's probably more a late second half dynamic, as we start to see things start to play out in the business.

So well managed FBS continues to apply in those businesses and it's certainly part of the resilience and durability story that you'll hear from Olumide, talk about when we get to Investor Day here in June.

Okay, yes. That's helpful. Last question, probably a silly one, but you had a bigger buyback in the quarter than I was expecting. With the stock where it is, what did you see in the last few months here before the spin occurred? Still plan to allocate a fair amount in that direction?

Yes. We didn't talk about this in the spin, I think because our prepared remarks are pretty straightforward and down the middle. We're going to pull in the spin, a little bit now that we're saying at the end of the second quarter. So that just speaks to the strength of the actions that we've taken.

Our team has done a great job. We've got -- Tammy has got a leadership team ready to go. We'll announce the CFO here in a few days. So we're in a good place relative to Ralliant.

The balance sheets are in a good place. We're still planning on investment grade. We bought back about 2.5 million shares, I think in the quarter. We'll continue to devote free cash flow to buy back certainly, an attractive prices.

There's opportunity there. And then as we get to the time of the spin in July, you'll certainly hear some of this at Investor Day and certainly both businesses as incredibly focused and well-run independent companies. You're going to have an opportunity to hear more about that, as they get to the second half guide. And I think we're in a really good position to do that.

So, I think it's an exciting time for sure for both Tammy and Olumide to lay that out. And I think, we're in a really good place to do that here in the coming months.

Okay. Thanks, Jim.

And I think with that we'll call it.

Yes, sir, this concludes our question-and-answer session. I'd now like to turn the call back over to Jim Lico for closing comments.

All right. Well, thanks, Brock. And as many said I appreciate all the thank yous. It's nice for you to say that, but I'll be still -- I'm not going anywhere.

I'm still working really hard with Tammy and Olumide here to finish off the second quarter, and get everything launched. Incredibly proud of our team over the last -- particularly over the last month and dealing with a lot of the challenges that we described. But I think at the end of the day, when you look at where we're at in true Fortive Spirit, businesses are countermeasuring well, dealing with challenges well and the power of FBS continues to demonstrate in so many ways. We didn't talk about the power of our free cash flow, but that's going to continue this year and it's going to set us up exceptionally well for what we -- what both independent companies will be doing here both in the back half of the year and certainly into 2026 as we continue to build two great businesses.

Thanks for all the time and the energy and the questions today. I know you're incredibly busy today, so we appreciate your time. We look forward to the follow-up and questions with our IR team and certainly with Mark and I. And we look forward to seeing all of you in June to talk about two great companies and how -- and the excitement that you'll hear and the passion, you'll hear from our teams, I think it's going to be an exciting day on June 10. We'll see you then.

Thanks, everyone.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines and have a wonderful day.