Fortive Q4 2021 Earnings Report

Fortive EPS Results

• Actual EPS: $0.79
• Consensus EPS: $0.78
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.70

Fortive Revenue Results

• Actual Revenue: $1.37 billion
• Expected Revenue: $1.44 billion
• Beat/Miss: Missed by -$62.47 million
• YoY Revenue Growth: +3.80%

Fortive Announcement Details

• Quarter: Q4 2021
• Date: 2/3/2022
• Time: Before Market Opens
• Conference Call Date: Wednesday, February 2, 2022
• Conference Call Time: 9:30PM ET

Fortive (NYSE:FTV) (NYSE:FTV) is a diversified industrial technology company that develops and provides essential products, software and services for customers in healthcare, manufacturing, utilities, commercial facilities and other professional markets. Its businesses focus on improving workplace productivity, safety, compliance, asset performance and operational efficiency.

Fortive’s portfolio has included brands such as Fluke, Tektronix, Industrial Scientific, Accruent, Gordian, Provation and ASP. These businesses offer electronic test and measurement instruments, calibration and reliability tools, workplace safety equipment, facility and asset-management software, cost-estimating and construction information services, healthcare workflow software, and infection-prevention products and services.

Fortive was formed through a 2016 separation from Danaher Corporation and is headquartered in Everett, Washington. The company serves customers internationally through operations and sales channels in North America, Europe, Asia-Pacific and other global markets. Its operating approach emphasizes continuous improvement, lean management practices and the development of specialized businesses serving mission-critical applications.

Fortive Q4 2021 Earnings Call Transcript

Key Takeaways

• Fortive reported Q4 revenue about $50 million below expectations as supply chain constraints and the Omicron surge limited its ability to ship against robust orders and backlogs.
• The company achieved 190 basis points of core operating margin expansion and 13% adjusted EPS growth in Q4, driving full‐year core revenue growth of 9.5%, 210 bps of margin expansion and 32% year‐over‐year adjusted EPS growth.
• Software‐enabled solutions delivered double‐digit growth in Q4 and 2021, led by eMate SaaS, ServiceChannel and Prophix, supporting Fortive’s goal of $950 million in software revenues for 2022.
• For 2022, Fortive guided to 5.5%–8.5% organic core revenue growth plus 3.5 points from acquisitions, adjusted operating margins of 24%–24.5%, adjusted EPS of $2.85–3.13 and free cash flow conversion of ~105%.
• Free cash flow in Q4 reached $265 million but conversion was lighter than expected as management invested in inventory to meet customer demand and saw lower year‐end receipts.

Presentation

[Operator]

Hello, my name is Josh, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Fourth 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 one on your telephone keypad. If you would like to withdraw your question, again, press star one. I would now like to turn the call over to Miss Elena Rosman, Vice President of Investor Relations. Miss Rosman, you may begin your conference.

[Elena Rosman, VP of Investor Relations at Fortive Corporation]

Thank you, Josh, and thank you everyone for joining us on today's call. With us today are James A. Lico, our President and Chief Executive Officer, and Charles E. 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 fortive.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.

[Elena Rosman, VP of Investor Relations at Fortive Corporation]

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 statement. With that, I would like to turn the call over to Jim.

[James A. Lico, President and CEO at Fortive Corporation]

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.

[James A. Lico, President and CEO at Fortive Corporation]

Free 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 Fortive Business System, we are well-positioned to deliver long-term sustainable value creation for all of our stakeholders.

[James A. Lico, President and CEO at Fortive Corporation]

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.

[James A. Lico, President and CEO at Fortive Corporation]

Fluke Digital Systems performed well, with 20%+ growth supported by strong demand for its eMaint 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 digit, led by the continued recovery of its rental business and improved net retention for its iNet offering.

[James A. Lico, President and CEO at Fortive Corporation]

Intelex 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, Intelex and ISC continue to see success with their award-winning HazardIQ solution, connecting real-time field data with EHS management software from Intelex. As anticipated, Accruent declined mid-single digits%, 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 digits%. Accruent 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.

[James A. Lico, President and CEO at Fortive Corporation]

Accruent 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 Accruent 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. ServiceChannel is off to a good start following its acquisition in August.

[James A. Lico, President and CEO at Fortive Corporation]

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. ServiceChannel is successfully expanding its new logo pipeline with some notable wins in the fourth quarter, including the leading health and beauty retailer in the U.K., 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 Technologies 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.

[James A. Lico, President and CEO at Fortive Corporation]

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. Tek continues to benefit from FBS, which helped 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 markets, 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.

[James A. Lico, President and CEO at Fortive Corporation]

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 low-single-digit in the fourth quarter. While we have grown the installed base, consumables continued 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. Censis revenues increased mid-single-digit, highlighted by another quarter of strong growth in its core CensiTrac SaaS offering, which increased in the low-20% range.

[James A. Lico, President and CEO at Fortive Corporation]

As in prior quarters, CensiTrac continued to see good momentum, adding new customers and saw improved upselling and cross-selling to existing customers. Fluke 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. Invetech 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 Fortive. 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.

[James A. Lico, President and CEO at Fortive Corporation]

Examples in the quarter include the reduction in supply chain risk at Fluke, IOS, Sensing Tech, and Tektronix through significant use of Obeyas 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 eMaint, which finished the year at 108% net dollar retention. While Accruent also increased monthly on-time renewal rate over 15 points from the beginning of the year.

[James A. Lico, President and CEO at Fortive Corporation]

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. We need to evolve our portfolio to serve higher growth markets with attractive long-term secular drivers. Both ServiceChannel and our IOS segment are acquisitions that significantly a broader offering of software-enabled solutions to address our customers' critical workflow productivity needs. Established market positions and custom-

[James A. Lico, President and CEO at Fortive Corporation]

Well-positioned best-of-breed SaaS platform. $200 million of high-growth software revenue with high incremental margins. The ServiceChannel's proprietary data assets and networks, we see significant upsell and cross-sell opportunities across our facilities and asset lifecycle management businesses. With Provation, 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 $0.12 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 , rational and actionable targets.

[James A. Lico, President and CEO at Fortive Corporation]

Looking forward 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. 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. We're 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.

[James A. Lico, President and CEO at Fortive Corporation]

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. 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 ServiceChannel, while FX was a modest headwind.

[James A. Lico, President and CEO at Fortive Corporation]

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 Tektronix 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 comparable in the tech.

[James A. Lico, President and CEO at Fortive Corporation]

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 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 through 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.

[James A. Lico, President and CEO at Fortive Corporation]

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 to the guidance 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 on a balanced set of assumptions, including the likelihood that supply chain constraints will persist through much of the year, at least through the first half. We expect another year of strong price realization to more than 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.

[James A. Lico, President and CEO at Fortive Corporation]

Lastly, in healthcare, we are planning for elective procedures to remain flat to 2021 levels in total, starting lower and ramping over the course of the year. Billion, representing 5.5%-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%-24.5%, with margin expansion in each segment. Adjusted diluted net EPS guidance of $3-$3.13, up 9%-14% with an effective tax rate of approximately 16%. Adjusting EPS growth normalized for tax would be 14%-19% for the year.

[James A. Lico, President and CEO at Fortive Corporation]

Free cash flow conversion is expected to be approximately 105% of net income, which would continue to show the benefits of the actions we've taken to build more resilient growth company capable of converting more revenue to earnings and more earnings to cash. Turning 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%-4.5% and approximately 4% revenue growth from acquisitions net of unfavorable FX.

[James A. Lico, President and CEO at Fortive Corporation]

Adjusted operating profit margin, net earnings per share of $0.65-$0.69, assuming a 15%-16% tax rate in the quarter and free cash flow conversion of approximately 70%, slightly higher than the recovery of receipts that slipped out of the fourth quarter. With that, I'll pass it back to Jim for some closing remarks.

[James A. Lico, President and CEO at Fortive Corporation]

Thanks, Josh. As many of you know, Fortive celebrated its 5th anniversary as a public company. As you can see on slide 13, we continue to validate the investment thesis that we have pursued since 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 50 points on average per year through this. Free cash flow is also up meaningfully over this time. We are on track to a 20% free cash flow margin in 2022.

[James A. Lico, President and CEO at Fortive Corporation]

Wrapping up on slide 14, thanking our team members for their exceptional values which underpin everything we do and how we do it. Extraordinary teams delivering extraordinary results again in 2021, even in the face of unprecedented supply chain constraints and prolonged COVID headwinds, while serving customers, each other, and our shareholders. Delivering financial results well 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 is more to do. As such, we expect another year of differentiated growth and profitability in 2022, 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.

[James A. Lico, President and CEO at Fortive Corporation]

Long-term, sustainable competitive advantages for our operating companies and our strategic segments yields returns for Fortive for a long time to come. Back to Elena.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

Thanks, Jim. Josh, we are now ready to take questions.

[Operator]

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one. Comes from the line of Julian Mitchell with Barclays. Your line is open.

[Julian Mitchell, Analyst at Barclays]

Hi, good morning.

[James A. Lico, President and CEO at Fortive Corporation]

Good afternoon, Julian.

[Julian Mitchell, Analyst at Barclays]

Good afternoon. Apologies. Just wanted to follow up on the sort of organic sales guidance for the year. Core growth of low single digit in Q1 that's moving to mid to high for the year as a whole. Kind of short cycle hardware. You know, 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. Just wondered what gives you that confidence in that sort of acceleration in IOS and PT?

[James A. Lico, President and CEO at Fortive Corporation]

Good for me, Julian. Morning and afternoon. First of all, I think when we look at the full year, as you said, we see some improvement in tech. We had a very good fourth quarter in Sensing. I think the supply chain constraints have been in Sensing, but we have good confidence there. Backlog in both businesses as we start the year. Quite frankly, we don't anticipate any backlog reduction in the first half and really minimal backlog reduction in the full year. 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. The drivers that we've talked about, some of those secular drivers continuing to play out.

[James A. Lico, President and CEO at Fortive Corporation]

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 positive. We still see the demand environment very good to deliver the year. Going into 2023, very strong as well.

[Julian Mitchell, Analyst at Barclays]

Thanks very much. 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 TSA phase 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? 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?

[James A. Lico, President and CEO at Fortive Corporation]

Yeah. Thanks. First of all, I think when we look at, we could take those high growth markets and the regions around the world outside of the United States, and as we brought them on successfully. You see that in the double-digit growth that we had outside of the United States in the quarter. We saw growth in capital around the world over the last few years. 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 at what happened in the fourth quarter, not anticipating that getting better through the year.

[James A. Lico, President and CEO at Fortive Corporation]

Even the Q1 may be a little bit lower on the electives as we see Omicron. I think as we stand today, we had great margin expansion at ASP and in health. 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 position the segment well for the addition of Provation, certainly another great add to the segment. I think we've been appropriate relative to predicting ASP. I think when you look at the core growth rate for the full year in 2022, you see our strategy playing out more broadly, and you certainly see that as we deliver strong margin expansion.

[Julian Mitchell, Analyst at Barclays]

Great. Thank you.

[James A. Lico, President and CEO at Fortive Corporation]

Thanks, Julian.

[Operator]

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

[Steve Tusa, Analyst at J.P. Morgan]

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? You know, is the third quarter like just maybe a little bit more color on kind of the organic growth trajectory as we kind of move through the year.

[James A. Lico, President and CEO at Fortive Corporation]

Hey, Steve, this is Chuck. You know, what we expect is, it probably not gonna be a surprise. We're constrained right now with supply chain, but as we move through time, we expect that single-digit, you know, up to 7% just gradually. There's not a step function that happens, doesn't happen all at the end of, you know, Q4 is what's built into this guide.

[Steve Tusa, Analyst at J.P. Morgan]

Right. To get to the high end, I guess, I mean, you're talking about something that's, you know, beyond that, obviously double-digit rate on organic?

[James A. Lico, President and CEO at Fortive Corporation]

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

[Steve Tusa, Analyst at J.P. Morgan]

You missed out on this quarter. I mean, if you just look it on a quarterly basis, that's, you know, 4% any given quarter from that. Is that kind of, you know, kinda lessens the trajectory to an extent there. Okay. On ASP. You know, why are you guys kind of forecasting electives to be trend there that makes you worried? Is you know that seems to be like, you know, really conservative. I don't know. Is there something you're seeing that others aren't on that front?

[James A. Lico, President and CEO at Fortive Corporation]

No. It's really that, what we've realized we haven't been able to predict.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

Going forward, 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. This is what happens if basically electives don't get better. Maybe if anything, I would, you know, we would say is that if electives go up, then we'd have upside here.

[Steve Tusa, Analyst at J.P. Morgan]

Got it. Okay.

[Steve Tusa, Analyst at J.P. Morgan]

Steve, maybe just to add on to that real quick, you know, it's we typically think of this as the Omicron variant and the new variant. It's also the combination, and we said this in the prepared remarks, that there are some specialty staffing challenges in the United States. We think it takes a little longer for that to come back. But I think the strength of it, 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. Yeah, I think we've been a little bit more conservative on the electric side.

[James A. Lico, President and CEO at Fortive Corporation]

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.

[Operator]

Got it. Thank you.

[James A. Lico, President and CEO at Fortive Corporation]

Thank you.

[Operator]

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

[Andrew Obin, Managing Director at Bank of America]

Yes.

[James A. Lico, President and CEO at Fortive Corporation]

Hi, Andrew.

[Andrew Obin, Managing Director at Bank of America]

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 these supply chain constraints, particularly hitting Fluke and Tek, you know, what are your thoughts about how to make the supply chain more resilient going forward? Thank you.

[James A. Lico, President and CEO at Fortive Corporation]

Yeah. Andrew, I think number one, as we said, you know, supply chain constraints, typically, I would think about them in two categories, one from a supplier perspective and the other around freight and logistics. 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 FPGA, 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 technology from a product perspective. You see that mostly in the higher-end products at Fluke and at Tek.

[James A. Lico, President and CEO at Fortive Corporation]

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. We're getting those things changed. We're, as you say, 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. All of those actions played out and will play out in the first quarter. That's why you see the core growth getting a little bit better at both Fluke and Tek in the first quarter, and then it continues to improve through the year. We're not anticipating necessarily a big shift and change relative to the supply side in the year.

[James A. Lico, President and CEO at Fortive Corporation]

What we're really seeing is the benefit of our countermeasures building through the year. That's how we think about it. On the freight side, it's clearly freight lane challenges from Asia to the US, 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 have, you know, we just don't have to ship product as far when we're shipping product into Asia than we are into the US. So that's, you know, a broad swath of the actions that we're taking. You know, it takes a little while to get some of those things all in place. We'll see that improvement. We're seeing that improvement now, and we'll see it build throughout the year.

[Andrew Obin, Managing Director at Bank of America]

That actually makes a lot of sense. Thank you. I missed the first couple of minutes, so I apologize if you've answered it. I'm looking at slide 13, the total software growth, and specifically, if also you could give us a sense, zeroing in, if you want to highlight revenue or ARR, just to see how, you know, what's happening there because that's a big part of the growth strategy going forward. Thank you.

[James A. Lico, President and CEO at Fortive Corporation]

Yeah. Yeah. Total software growth was low double digits in Q4 and in the full year. I think our core revenue growth was mid-single digit in the fourth. Good. I think really what we saw that was really good was our ARR growth in the fourth quarter was this high single digit. I think we saw a good benefit from a number of our strategies playing out both core and certainly with the additions of ServiceChannel and Provation that gets to the 2022 you're referencing. We'll see that growth be double digit in Q1. We're really seeing, I think, good benefits. We saw some good benefits. Takes a little while on the SaaS side for that revenue to impact the full year.

[James A. Lico, President and CEO at Fortive Corporation]

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 the Provation.

[Andrew Obin, Managing Director at Bank of America]

Fantastic. Thank you very much.

[Operator]

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

[Nigel Coe, Analyst at Wolfe Research]

Thanks. I'll take it morning because it is morning where you are. Just wanted to dig into Fluke and Tektronix. You know, how did the sell-in versus sell out through the channel play out? Because I'm assuming that, you know, the channel wants more. There's a big disconnect between the sell-through the distribution channels. Any color on where inventories are right now would be helpful.

[James A. Lico, President and CEO at Fortive Corporation]

I think I said this on the third quarter call, but we think about inventory now. We also think about, given that we've got a substantial backlog, we're also gonna look at what distributors have on order so that we make sure we understand relative to true demand versus maybe inventory building on their side. I think in that regard, we see good sales out. We don't see big inventory on hand or relative to the inventory build. We're seeing a good demand environment relative to both Fluke and Tek. I think it is somewhat impacted by the availability. High 90s. I think it in general, the question as well.

[James A. Lico, President and CEO at Fortive Corporation]

We're seeing good demand on the demand front, and I think we're seeing that in some of our channel partners' external comments. We feel good about the demand environment where we have distribution businesses on a global basis. Better in Asia. We saw, you know, 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 Tek, which we also think will have nice impact.

[Nigel Coe, Analyst at Wolfe Research]

Yeah. I mean, the question is really more about depletion of inventory rather than life, which I think it probably is.

[James A. Lico, President and CEO at Fortive Corporation]

Yeah, it is.

[Nigel Coe, Analyst at Wolfe Research]

That was the acceleration, which seems to be what certainly we're focused on. My follow-up question. When do you think Accruent will get back to revenue growth?

[James A. Lico, President and CEO at Fortive Corporation]

Yeah, I think I answered that on the software numbers as well. We do have less days in the quarter, bit of impact relative to less days. We in some of the guidance, you know, the combination of Accruent and Gordian, we sort of think about that. We've moved on a full year basis at low double digits. That's probably a little higher at Gordian. But we would see, right now we'd see Accruent in the 40s for 2022. We had good ARR growth in the fourth quarter. You know, the combination of the work we're doing, we'll still have some SaaS transition because in many cases, we're relying on new logos, a little bit more of a headwind than if we were to SaaS like we are at Provation.

[James A. Lico, President and CEO at Fortive Corporation]

It's that combination of things that we're doing, new logo growth, but at Accruent. Also just 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% in the year. It's a combination. You know, that's not our biggest product line, but over time, at that growth rate, it inevitably takes over, you know, being a bigger part of the growth story, and we'll see that starting to play out.

[Nigel Coe, Analyst at Wolfe Research]

Great. Thank you.

[James A. Lico, President and CEO at Fortive Corporation]

Thank you.

[Operator]

Your next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open.

[Deane Dray, Analyst at RBC Capital Markets]

Thank you. Good day, everyone.

[James A. Lico, President and CEO at Fortive Corporation]

Good afternoon, Deane.

[Deane Dray, Analyst at RBC Capital Markets]

I appreciate right up front you sized the $50 million in revenue missed related to supply chain, but that's really become sort of a catch-all for everyone. Can you give any more specifics either by product line? Is it semiconductor-related issues, customer readiness? Just maybe take us through what the actual blockages were.

[James A. Lico, President and CEO at Fortive Corporation]

Yeah. I would say first, given the fact that I've kind of been on East Coast time for the better part of 20 years, this is a fine change, but we do listen. Elena has been a great add for sure. We're really excited to talk about the frame that we've got at a time zone that's easier for all of you. I think number one, supply chain. Think of the remaining piece of that as probably COVID-related, a chunk of that being electives being lower than we anticipated. Let's break that down a little bit. The majority of that is at Fluke and Tektronix.

[James A. Lico, President and CEO at Fortive Corporation]

I would say at Fluke and Tek, it's really about, it really is about like Andrew's question, very much around, a big, big portion of that is application-specific ICs. Those are technologies that are pretty much dead. The work we do, as I described before, is really the countermeasure to doing that. 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.

[James A. Lico, President and CEO at Fortive Corporation]

You might have seen this in other government. People have government contracts on the commercial side and on the military side where customers have to come in to validate at the end of the year just given COVID. That's a swath of it. The biggest bucket, the highest Pareto bar, is really those supply chain issues we described at Fluke and Tek.

[Deane Dray, Analyst at RBC Capital Markets]

That's really helpful. Just a follow-up question on Tektronix, record backlog. Can you parse out how much of that is, you know, supply chain related, but also, you know, with all the semiconductor capacity coming on, you would think that there'd be some demand there that might have also transferred.

[James A. Lico, President and CEO at Fortive Corporation]

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 backlog in 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 for maybe industrial markets. As we've talked about, you know, we're seeing, you know, some of the new innovation on the 2 Series, some different probe categories, and we mentioned the prepared remarks, the new 5 Series.

[James A. Lico, President and CEO at Fortive Corporation]

We're seeing really good customer interest in those products. Hence, our book-to-bill was so strong. We really think the demand cycle for Tek is certainly gonna be strong in 2022, and quite frankly, as much as you can get early signs on this, we think strong in 2023 as well, given those dynamics.

[Deane Dray, Analyst at RBC Capital Markets]

Thank you.

[James A. Lico, President and CEO at Fortive Corporation]

Thanks, Deane.

[Operator]

Line of Scott Davis with Melius Research.

[Scott Davis, Founding Partner at Melius Research]

Hey, guys. Elena, welcome.

[James A. Lico, President and CEO at Fortive Corporation]

Hey, Scott.

[Scott Davis, Founding Partner at Melius Research]

To have you back.

[Elena Rosman, VP of Investor Relations at Fortive Corporation]

Thanks, Scott.

[Elena Rosman, VP of Investor Relations at Fortive Corporation]

Is your total installed base of boxes higher today than, you know, when you bought it? Has that grown at all, Jim?

[James A. Lico, President and CEO at Fortive Corporation]

Yeah. We said, I think, you know, we've had low single digit compounded growth in installed base over the last several years. I think it's capped at single digit in a year. We've seen growth in which, you know, is additional boxes in your terminology.

[Scott Davis, Founding Partner at Melius Research]

Okay. Also clarification. Did you say that when that backlog in the first half of the year?

[James A. Lico, President and CEO at Fortive Corporation]

We don't anticipate the backlog at the Tek side, quite frankly, Deane, or sorry, Scott. We don't see this year. We have a really strong backlog at Pacific Scientific right now.

[Scott Davis, Founding Partner at Melius Research]

Okay. Last, just quickly, what is Lean Portfolio Management? I don't recall hearing that term before.

[James A. Lico, President and CEO at Fortive Corporation]

Yeah. It's our new innovation tool. It's really a thing. Historically, it's really applies to both software and hardware. It's a new tool that we're deploying in every one of the bus. In terms of how to look at early stage innovation, as opposed to, you know, over the years, we've been a little bit more focused on 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 based, focused. On, you know, new secular drivers. Build over time, and we should see better returns on our R&D investment. We should see accelerated core growth from those investments as well.

[Operator]

Search Partners, your line is open.

[Analyst]

Buddy. Hey.

[James A. Lico, President and CEO at Fortive Corporation]

Yeah.

[Analyst]

Just a few loose ends here. A lot of ground covered already. Just on price, the 2% number. Can you tell us how much price is embedded in your 2022 guide?

[James A. Lico, President and CEO at Fortive Corporation]

Yeah, that was in Q4, the 2% overall in Q4 2021. For what we're thinking, what's embedded in our guide is about 2% for 2022. That's, you know, about twice what we would normally get as in a normal year.

[Analyst]

on Tek in the recent past is what's actually driving the increase, and should we expect it to move higher in future years?

[James A. Lico, President and CEO at Fortive Corporation]

Well, I think that we came into the year thinking 14% is the right baseline for us, and I think that's pretty good. The items that came through usually around the split from Danaher that are really hard to predict. We don't see any of those going forward, so we normally revert back to that 14%. What we don't have is 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.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

So in 2022, you know, we actually end up with, you know, probably a $0.12 headwind, you know, versus and that's embedded in our guide. If the R&D tax credit—So the rate, 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? No, I think we anticipate that to get renewed, so we—that's not changing. It's really about the what's going on internationally in tech. Is there any, I don't know, disruption or dyssynergy going on as ServiceChannel comes in, you know, maybe mutual customers where one plus one isn't equaling two, just any color there.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

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

[James A. Lico, President and CEO at Fortive Corporation]

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, 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. 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. Particularly some of the growth drivers, particularly like about things like workspace management, no conflict whatsoever. That's really an independent strategy and product line that really resides at Accruent.

[James A. Lico, President and CEO at Fortive Corporation]

I think we've got some good levers to pull in the Accruent business. Obviously the broader opportunity that we have with ServiceChannel around the things they do is really great. I think with the combination of what we do at Gordian and Accruent and some of those overlaps is only gonna continue to help us build a, you know, a better position and value proposition for customers.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

Great. Thank you.

[James A. Lico, President and CEO at Fortive Corporation]

Thanks.

[Operator]

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

[Andy Kaplowitz, Sector Head and Industrials Equity Research at Citigroup]

Good morning, everyone.

[James A. Lico, President and CEO at Fortive Corporation]

Hey, Andy.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

Andy.

[Andy Kaplowitz, Sector Head and Industrials Equity Research at Citigroup]

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? It seems like supply chain headwinds have been worse for some of your peers. I'm just curious as to what's going on for you in Europe. 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?

[James A. Lico, President and CEO at Fortive Corporation]

Yeah, I think I'll take it. Number one on the Europe side, we really do have a comp issue in Invetech. You know, last year Invetech had really dramatic growth in the fourth quarter, and that was really a customer in Europe. 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.

[James A. Lico, President and CEO at Fortive Corporation]

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. We would anticipate continued good growth in China for the year. We think that high growth markets continue to be good. 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. 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, was a little slowed in the fourth quarter.

[James A. Lico, President and CEO at Fortive Corporation]

That improves, I think, over time as some of these freight lanes, you know, get a little bit uncongested over time. That gives you a broad swath. I would also say we'll see North America also improve. 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. Bringing all that back, supply chain improvements really help us globally, particularly in the U.S. and Europe as we go forward here.

[James A. Lico, President and CEO at Fortive Corporation]

As I mentioned, relative to those, some of the activities that we're engaged in relative to improving the supply chain, they'll obviously impact our what I would call our developed markets in U.S. and Europe that probably more predominantly than anywhere else.

[Andy Kaplowitz, Sector Head and Industrials Equity Research at Citigroup]

Thanks for that, Jim. Then, Chuck, you're guiding to relatively normal conversion for Fortive. I think 105% for 2022. Talk about your confidence that excess inventory is basically peaking now on cash generation if the R&D tax credit is not extended.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

I probably have to come back to you on the R&D tax credit if it's not extended. That'd be surprising, but you know, potentially, I guess, every time until it's renewed, we put that on there. Let me come back in our follow-up call. I'll have that number for you. From working capital, I think that what'll 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 will come down. We'll primarily start seeing that improvement in the first quarter. But some take in our conversion ratio, you know, about what can go on there.

[Charles E. McLaughlin, SVP and CFO at Fortive Corporation]

There's some things going on with the timing of tax payments there that.

[James A. Lico, President and CEO at Fortive Corporation]

You know, we're talking one or 2% here that can go either way. We'd expect normally we start off in Q1 with a conversion. It accelerates. 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.

[Operator]

Appreciate it, Jeff.

[James A. Lico, President and CEO at Fortive Corporation]

Thanks.

[Elena Rosman, VP of Investor Relations at Fortive Corporation]

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

[Operator]

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

[John Walsh, Research Analyst at Credit Suisse]

Hi there, everyone.

[James A. Lico, President and CEO at Fortive Corporation]

Yeah.

[John Walsh, Research Analyst at Credit Suisse]

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

[James A. Lico, President and CEO at Fortive Corporation]

Yeah, John. You know, we always say the funnel is good, and I would say that's very true. We remain busy. You know, the private market tends to, you know, 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. 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.

[James A. Lico, President and CEO at Fortive Corporation]

I would say, you know, we feel very good about the two deals we've done over the last few months with ServiceChannel and then Provation closing at the end of the year. Lots to do with those two businesses to really take and help those businesses continue to. They're great business. We bought great businesses. We've got great opportunity there. We're spending, you know, time on making sure they become, you know, they get a great start in Fortive. We remain disciplined and we'll watch the, you know, these private transactions. But I do think it'll be a couple of quarters before those valuations start to see themselves hit in the private market.

[John Walsh, Research Analyst at Credit Suisse]

Great. 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, you know, have access to those components that you need versus, you know, how much actually needs the supply chain to get healthier as we go through the year?

[James A. Lico, President and CEO at Fortive Corporation]

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. We're gonna make it more of our own luck here as we go forward relative to redesigning, requalifying, those kinds of things. 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 where they stand on commitments.

[James A. Lico, President and CEO at Fortive Corporation]

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. You know, we'll continue to prevail. I think when you look at our maybe batting average on actions, it continues to improve through the year. You know, we expect it to continue as these countermeasures work. Certainly as we think about things getting better, we don't have a belief that it dramatically gets better, but we really see the benefit of the actions that we've been taking, a higher probability of those actions really taking place.

[John Walsh, Research Analyst at Credit Suisse]

Great. Thanks for taking the question.

[James A. Lico, President and CEO at Fortive Corporation]

Thanks, John. I think

[Elena Rosman, VP of Investor Relations at Fortive Corporation]

Jim, do you have any final comments?

[James A. Lico, President and CEO at Fortive Corporation]

Yeah. Hopefully this time works better for you. We and this process works well for your timeframe. I know you're at an incredibly busy day and a busy time of the season. We appreciate the time and energy that you put into 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.

[James A. Lico, President and CEO at Fortive Corporation]

We walk into 2022, a lot of our strategy playing out in terms of healthcare, 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 Tek and within Sensing. We're incredibly fortunate to be 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 through 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.

[Operator]

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

Participants

Executives

• Charles E. McLaughlin, SVP and CFO
• Elena Rosman, VP of Investor Relations
• James A. Lico, President and CEO

Analysts

• Andrew Obin, Managing Director at Bank of America
• Andy Kaplowitz, Sector Head and Industrials Equity Research at Citigroup
• Deane Dray, Analyst at RBC Capital Markets
• John Walsh, Research Analyst at Credit Suisse
• Julian Mitchell, Analyst at Barclays
• Nigel Coe, Analyst at Wolfe Research
• Scott Davis, Founding Partner at Melius Research
• Steve Tusa, Analyst at J.P. Morgan
• Analyst