Fortive Q4 2021 Earnings Call Transcript

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Provided by Quartr
February 2, 2022

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.
AI Generated. May Contain Errors.
Earnings Conference Call
Fortive Q4 2021
00:00 / 00:00

There are 13 speakers on the call.

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 4th quarter 2021 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. Quarter.

Operator

After the speakers' remarks, there will be a question and answer session. Call. I would now like to turn the call over to Ms. Elena Rosman, Vice of Investor Relations. Ms.

Operator

Rosman, you may begin your conference.

Speaker 1

Thank you, Josh, and thank you, everyone, for joining us quarter on today's call. With us today are Jim Leko, our President and Chief Executive Officer and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non GAAP financial measures on today's call. Call. Information required by Regulation G are available on the Investors section of our website at fortive.com.

Speaker 1

Quarter. Our statements on period to period increases or decreases refer to year over year comparisons on a continuing operations basis. Call. During the call, we will make forward looking statements, including statements regarding events or developments that we expect or anticipate will quarter or may occur in the future. These forward looking statements are subject

Speaker 2

to

Speaker 1

a number of risks and actual results might differ materially quarter from any forward looking statements that we make today. Information regarding these risk factors is available on our SEC filings, quarter, including our annual report on Form 10 ks for the year ended December 31, 2020. These forward looking statements quarter. Speak only as of the date that they are made, and we do not assume any obligation to update any forward looking statements. Quarter.

Speaker 1

With that, I would like to turn the

Speaker 3

call over to Jim. Thanks, Elena. Hello, everyone, and thank you for joining us. Quarter. We delivered solid performance in the 4th quarter, closing out a very strong year as we focused on delivering for customers in an ongoing challenging environment.

Speaker 3

Quarter. While we saw sequential growth and margin expansion across the portfolio, revenue in the quarter finished roughly $50,000,000 below expectations quarter as continued supply chain constraints and the impact from the omicron surge hindered our ability to deliver on our robust orders and backlog. Quarter. Our business has performed well despite these challenges, generating 190 basis points of core margin expansion and 13% adjusted earnings growth in the quarter. Quarter.

Speaker 3

Our tax rate was flat on a year on year basis at 9%, however, lower than our expectations coming into the quarter. 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. Quarter. For the year, we delivered core revenue growth of 9.5% and expanded adjusted operating margins by 2 10 basis points, quarter, driving 32% year over year growth in adjusted earnings. Strong demand for software enabled workflows yielded double digit software growth in 2021 and the 4th quarter.

Speaker 3

These results are a testament to the higher growth, more resilient, higher margin portfolio that we've constructed through organic innovation and Strategic M and 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. As you can see on Slide 4, all of our segments contributed to our solid 4th quarter results, quarter, 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 4th quarter with core up 0.8%.

Speaker 3

Quarter. This included low single digit growth in North America and high teens in China, partially offset by high single digit decline in Western Europe. Quarter. Starting with Fluke, core revenue declined slightly as continued end market demand and order growth across its product portfolio quarter. We're more than offset by supplier and logistics network challenges constraining revenue in the 4th quarter.

Speaker 3

Loop Digital Systems performed well quarter with 20% plus growth supported by strong demand for its eMate SaaS offering and capped the year with greater than 30% growth in quarter bookings in Q4. Fluke also continued to see momentum within its product innovation pipeline. They introduced a new market leading power quality platform, 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 4th quarter, 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.

Speaker 3

In EHS, Industrial Scientific revenue increased mid single digit, quarter, led by the continued recovery of its rental business and improved net retention for its Inet offering. Intellect grew by mid teens, quarter representing the strongest net dollar retention we've seen in the past 2 years. Strong customer service execution, reduced churn quarter. And the application of funnel management tools helped deliver a record year for customer upselling. In addition, Intellect and ISC quarter.

Speaker 3

Continue to see success with their award winning HazardIQ solution, connecting real time field data with EHS management software from Intellect. Quarter. As anticipated, Accruent declined mid single digit, although it was up sequentially despite less billing days in the 4th quarter. Quarter. On a same day basis, their SaaS sales would have been up mid single digit.

Speaker 3

Current continued to capitalize on strong demand quarter for its EMS product line due to continued momentum and return to workplace solutions with bookings up greater than 20% for the quarter and almost 50% quarter for the full year. Accruent also posted its 2nd highest quarter on record for SaaS bookings and drove another quarter of improvement in net dollar retention quarter as it continues to deploy FBS tools to deliver on a higher on time renewal rate across its growing SaaS customer base. Quarter. We expect to see this result in higher growth in Accruent in 2022. Gordian increased mid single digit, quarter, driven by another strong quarter in procurement.

Speaker 3

Gordian also secured some notable wins in the 4th quarter, including the capture of 2 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 twenty twenty two. Service channel is off to a good start following its acquisition in August. Revenue grew substantially in the 4th quarter with SaaS increasing low double digits quarter. The SaaS bookings more than doubling on a year on year basis. Service Channel is successfully expanding its new logo pipeline with some notable wins in the 4th quarter, quarter, including the leading health and beauty retailer in the UK and is leveraging FBS tools and implementing lean portfolio management quarter to position the company for additional innovation and growth.

Speaker 3

Moving to the middle of Slide 4, the Precision Technologies segment posted quarter to the total revenue increase of 2.1 percent with core growth of 2.6%. This included mid teens growth in China, quarter. While Western Europe was up slightly, partially offset by a low single digit decline in North America. Tektronix grew low single digits despite strong customer demand, quarter, driving double digit order growth across its major regions, resulting in a book to bill of 1.2 in the 4th quarter. Quarters 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.

Speaker 3

TAC continues to benefit from FBS, which helped to reduce supply chain risk and improve price realization across the business. Quarter. Sensing Technologies increased high single digit in the 4th quarter with good growth in its industrial, semiconductor, HVAC and medical end markets quarter. Despite continued supply chain challenges. Similarly, Pacific Scientific EMC built further backlog in the quarter as supply chain constraints persisted.

Speaker 3

Quarter. Tactile continued to see strong bookings growth in its core market, including aircraft and space, while revenues declined mid teens resulting in a book to bill of 1.13 for the year. Quarter. Moving to Advanced Healthcare Solutions on the right side of Slide 4. Total revenue increased 1.5% quarter.

Speaker 3

Despite a core revenue decline of 0.8%. This included high single digit growth in China, flat performance in North America quarter and a mid-twenty percent decline in Western Europe. Starting with ASP, revenue declined low single digit in the 4th quarter. While we have grown the installed base, consumables continue to be impacted by lower elective procedure rates, especially as the omicron variant surged in the U. S.

Speaker 3

In December, quarter adding to existing skilled staffing shortages at hospitals and ambulatory surgical centers. These challenges primarily impacted revenue in the U. S, quarter. Our high growth regions grew double digits. We are also pleased with the continued evolution of FBS with significant progress and operating margin expansion in the business.

Speaker 3

Quarter. Sensus revenues increased mid single digit, highlighted by another quarter of strong growth in its core SensiTrak SaaS offering, which increased in the low 20% range. Quarter. As in prior quarters, SensorStack continued to see good momentum, adding new customers and saw improved up selling and cross selling to existing customers. Look Health Solutions increased mid single digit as revenue and margin benefited from growth investments made throughout the year, driving strong double digit growth in its biomedical Test Equipment Business.

Speaker 3

And Invotek declined low single digit as it lapped a top prior year comparison that included strong COVID related revenues in 2020. Quarter. Our strong margin performance in 2021 is just one example of how FBS continue to be an important differentiator for Fortive. Quarter. As shown on Slide 5, 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.

Speaker 3

Quarter. Examples in the quarter include the reduction in supply chain risk at Fluke ISC, SensiTech and Tektronix through significant use of OBEAS 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, quarter. Contributing to their margin expansion in the quarter. Through the deployment of lean portfolio management, our newest FBS innovation tool, Tektronix over drove revenue achievement on recent new products, including the just launched next generation of its 5 Series MSO offering.

Speaker 3

Quarter. We are also making meaningful improvements in net dollar retention in our software businesses, allowing us to deliver more profitable and accelerated growth in eMate, quarter, 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 quarter and full year. Despite COVID, we have continued to support all of our leadership development in Kaizen activities. Quarter. As a result of the rigorous application and dedication by our teams, we're continuing to benefit from our culture of continuous improvement.

Speaker 3

Quarter. We continue to evolve our portfolio to serve higher growth markets with attractive long term secular drivers. Both service channel and our IOS segments quarter. Our acquisitions that significantly expand our broader offering of software enabled solutions quarter to address our customers' critical workflow productivity needs. We're focused on established market positions and customers quarter and full year 2018.

Speaker 3

We're pleased to

Speaker 2

announce that we're making a decision

Speaker 3

to deliver $200,000,000 of high growth software quarter revenue with high incremental margins. The Service Channel's proprietary data assets and networks, we see significant upsell and cross sell opportunities across quarter, our Facilities and Asset Life Cycle Management businesses. And with Provisions, we are quarter strengthening our presence in hospitals and ASCs with expanded software and data opportunities, leveraging leading positions in GI quarter 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. Call.

Speaker 3

I'm also incredibly proud of the work we've done in 2021 to continue our progress towards building a more sustainable future. Quarter. As you can see on Slide 7, we're pleased to report that we're focused on creating a strong operational and actionable target. Leading forward quarter. Today is a diverse board and leadership team with recent hires advancing our commitment to top talent and diversity.

Speaker 3

Quarter. We recently ran our day of caring for the next time our employees have dedicated over 400,000 hours of quarter and our employees'

Speaker 2

employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees' employees'

Speaker 3

employees' employees' employees' employees'

Speaker 4

employees' employees'

Speaker 3

quarter and we are well on our way to achieving our carbon emission reduction targets and recently completed our TCFD reporting GAAP analysis to strengthen our actively engaged and responsible sourcing initiatives, quarter. And we take seriously the need to understand both the labor and the human rights practices across our supply chain. Quarter. In 2021, we became a signatory to the UN Global Compact, further embedding our commitment to a sustainable future quarter and our

Speaker 2

company strategy,

Speaker 3

culture and daily operations. Quarter. And we were also named 1 of America's Most Responsible Companies by Newsleek for the 3rd consecutive year. It's our shared purpose that quarter. So, it 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.

Speaker 3

Quarter. We look forward to continuing to make progress on our sustainability journey in the years to come, our free cash flow and our Q1 and full year 2022 guidance. Quarter. Thanks, Jim, and hello, everyone. I'll begin on Slide 8 with a quick recap of our 4th quarter performance.

Speaker 3

Quarter. We generated year over year total revenue growth of 3.8% with core growth of 1%. Acquisitions contributed quarter over 3 points of growth in the quarter, primarily from service channel, while FX was a modest headwind. Quarter. Year over year orders and backlog in our hardware businesses grew 14% 84%, respectively.

Speaker 3

Quarter. Just gross margins approached 58% in the quarter and operating margins were 24.4%, near the high end of our guidance. Quarter. This reflected 190 basis points of core operating margin expansion with over 200 basis points of price realization. Quarter.

Speaker 3

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. Quarter. North America revenues were roughly flat, reflecting strong demand across multiple end markets, offset by supply chain constraints quarter impacting Tektronix and Fluke as well as lower consumables at ASP. Western Europe saw year over year declines across much quarter of the portfolio, including a difficult COVID related compare at Imtech.

Speaker 3

That said, we had good growth at ASP, where elective procedure rates growth regions grew revenues double digits in the quarter, driven by mid teens growth in

Speaker 2

quarter and we are pleased to

Speaker 3

announce that we are in China with strong performance across the portfolio. Turning to Slide 9, quarter. We generated $265,000,000 of free cash flow in the 4th quarter, representing a robust revenue plan for 2022, quarter. And we also saw a change in receivables trend with lower customers' receipts in the quarter than we had expected. Same with cash flow and through M and A in 2021 quarter and ended the year with net leverage of 2.4 times.

Speaker 3

We estimate M and A capacity of approximately $5,000,000,000 over the next 3 years and the funnel remains full across each of our segments with both hardware and software opportunities. Quarter. We remain disciplined looking to add assets to our portfolio that significantly enhance the leading positions of our segments and increase our value propositions quarter. Turning now to the guide on Slide 10. Quarter.

Speaker 3

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 quarter. Secular tailwinds include an unbalanced set of assumptions, including the likelihood that quarter. We expect another year of strong price realization quarter to more than offset continued cost inflation quarter and the benefits of our software strategy to generate double digit software growth in 2022, taking total software revenues to $950,000,000

Speaker 2

quarter. And lastly,

Speaker 3

in healthcare, we are planning for elective procedures to remain flat to 2021 quarter levels in total, starting lower and ramping over the course of the year, dollars 1,000,000,000 record advancing quarter and full year 2018.5% to 8.5% core growth, while acquisitions net of unfavorable quarter. Will contribute an additional 3.5 points of growth for the year. Adjusted operating profit margins in the range of 24% to quarter.5 percent with margin expansion in each segment. Adjusted diluted net EPS guidance of 3

Speaker 5

quarter to

Speaker 3

$3.13 up 9% to 14% quarter with an effective tax rate of approximately 16%. Adjusting quarter. Growth normalized for tax would be 14% to 19% for the year. Free cash flow conversion is expected to be approximately 105% of net income, which we continue to show the benefits of the quarter. We've taken to build more resilient growth company capable of converting more revenue to earnings and more earnings quarter cash.

Speaker 3

Turning to Slide 12 and the Q1 guide. We expect a similar external environment as the second half of twenty twenty one quarter with revenue of $1,340,000,000 at the midpoint, with core revenue growth in the range of 1.5% to 4.5% quarter and approximately 4% revenue growth from acquisitions net of unfavorable FX. Adjusting quarter and net earnings per share of $0.65 to $0.69 assuming a 15% to 16% tax rate in the quarter and free cash flow conversion of approximately 70%, slightly higher than the full recovery of receipts that slipped quarter. With that, I'll pass it back to Jim for some closing remarks. Thanks, Chuck.

Speaker 3

Quarter. As many of you know, Fortive celebrated its 5th anniversary as a part

Speaker 4

of the business.

Speaker 3

And as you can see on Slide 13, we quarter and we continue to validate the investment thesis that we have pursued since 2016. Quarter. 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. Quarter. Our gross and operating margins have increased as well.

Speaker 3

We've improved gross margins over 800 basis points per year. Quarter operating profit margin expansion and free cash flow is also up meaningfully quarter. Over this time, we are on track to a 20% free cash flow margin in 2020. Quarter. Wrapping up on Slide 14 and beyond, we expect our team members for their exceptional quarter and our outlook for the Q4 of fiscal 2020.

Speaker 3

We are pleased to announce that we are well positioned to see quarter. Even in the face of unprecedented supply chain constraints and prolonged COVID headwinds, each other and our shareholders delivering financial results quarter, well ahead of our initial expectations coming into the year. While each of our businesses continues to evolve and improve across key metrics, quarter. We know there is more to do. As such, we expect another year of differentiated growth and profitability into 2022, quarter delivering on the multi year targets set back at our May 2021 investor conference.

Speaker 3

Quarter. We know you have a choice, and we want you to be with us for the long term. We want you to be with us for the long term sustainable competitive quarter and full year 2019. We expect to continue to see strong growth in our operating companies and our strategic segments yields returns for Fortive for a long time quarter.

Speaker 1

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

Operator

quarter. Call. Your line is open.

Speaker 6

Hi, good morning.

Speaker 3

Quarter. Good afternoon, Julian.

Speaker 6

Good afternoon, apologies. Just wanted to follow-up on the

Speaker 3

sort of organic quarter sales guidance for the year. We expect to see

Speaker 6

a strong growth of low single digit quarter in Q1 that's moving to mid to high for the year as a whole. Quarter kind of short cycle hardware. What gives you the confidence in that acceleration? I understand fully that supply quarter. And conditions make it a little bit easier for you to execute on orders.

Speaker 6

But conversely, as you go through the year, we may quarter. And so just wondered what gives you that confidence in that sort of quarter. I'll take

Speaker 4

a quick

Speaker 3

break from you, Jillian, morning and afternoon. Quarter. First of all, I think when we look at the full year, as you said, we see some improvement

Speaker 2

quarter and

Speaker 3

we had a very good Q4 in sensing. So I think the supply chain constraints have been in sensing, but we have quarter. Good confidence there, I think we're

Speaker 4

going to continue to see

Speaker 3

the backlog in both businesses as we start the year. And quite frankly, we don't

Speaker 4

quarter. We anticipate

Speaker 3

any backlog reduction in the first half quarter and really minimal backlog reduction in the full year. So we see the demand side quarter. 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 quarter. Some of those secular drivers continuing to play out.

Speaker 3

So whether it's the strength in innovation, whether it's some of the things that we've been doing in particular markets quarter to differentiate the business. We see the demand front still quarter perspective. We still see the demand environment very good to deliver the year quarter 2023 very strong as well.

Speaker 6

Thanks very much. And then just my second quick one on the Advanced Healthcare Solutions. It's been a tough period obviously for 2 or 3 years with the TSA quarter and then COVID and the lingering sort of aftermath. Just wondered, quarter. When you're looking at that business, would you say that after that sort of tough 3 year period, the guide is fairly conservative there for 2022 now.

Speaker 6

And how do you assess the competitive position of AHS? I suppose particularly in the ASP piece, do you

Speaker 2

quarter. We're excited about

Speaker 3

the progress we could take those high growth markets and really regions around them outside of the United States. And as we brought them in, quarter success. And you see that in the double digit growth that we had outside of the United States in the quarter. We saw quarter and we're pleased to see the continued growth in capital around the world and

Speaker 4

we're pleased to see the growth in capital around the world and we're pleased

Speaker 2

to see the growth in capital around the world and we're pleased

Speaker 3

to see the growth in capital over the last few years. So we've quarter and we see that on the equipment side. As you point out, a little bit tougher on the electives than we anticipated.

Speaker 4

Quarter. That's been a tough

Speaker 3

thing to predict. We feel we're going into the year quarter. Relative maybe not conservative, but appropriate in terms of looking what happened in the 4th quarter, not anticipating quarter. We're seeing that getting better through the year, even the Q1 maybe a little bit lower on the electives quarter as we see Omicron. But I think as we stand today, we had great margin expansion at ASP and in Health.

Speaker 3

Quarter. And we think the strategy is playing out very much. We've done a nice job on the gross margin and operating margin side at ASP. More broadly, I think we positioned the segment well, quarter. The addition of probation, certainly another great add to the segment.

Speaker 3

Quarter. So I think it's an appropriate relative to predicting ASP. And I think when you look at the core growth rate for the full year in 'twenty two, you quarter. You see our strategy playing out more broadly and you certainly see that as we continue to deliver strong margin expansion. Great.

Speaker 3

Thank you. Quarter. Thanks, Julien.

Operator

Your next question comes from the line of Steve Tusa with JPMorgan. Your line is open.

Speaker 7

Hey, guys. I don't know. Good afternoon, I guess. I don't know. So quarter.

Speaker 7

I guess just cutting it a different way. How do you expect the year to build from a core growth perspective? Quarter. Should we expect a nice step up in 2Q? Is the 3rd quarter like just maybe a little bit more color on kind of the organic growth trajectory as we kind of move through the year.

Speaker 3

Hey, Steve, this is Chuck. What we expect is quarter. Probably not going to be a surprise. We're constrained right now with supply chain. But as we move through time, we expect that Up to 7% for the quarter, just gradually there's kind of step function that happens, doesn't happen all at the end of Q4 is what's built into this guide.

Speaker 3

Right. But to get to the quarter. I guess to get to the high end, I

Speaker 7

mean, you're talking about something that's beyond that, quarter full digit rate on organic.

Speaker 3

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

Speaker 7

You missed out on quarter. I mean, if you're just looking on a quarterly basis, that's 4% on a given quarter from that. Is quarter. That kind of lessens the trajectory to an extent there. Okay.

Speaker 7

Quarter on ASP. Why are you guys kind of Forecasting electives to be a trend there that makes you worried is that seems to be like really conservative. So I don't know, is there something you're seeing that others aren't on that front?

Speaker 3

Quarter. No, it's really that what we realized we haven't been able to predict quarter. Going forward, so we have one show is, hey, this is where it is right now. You can see the margin expansion quarter. It's been good all year long and we don't expect us to have growth there.

Speaker 3

And this is what happens if basically the factories don't get better. Quarter. And maybe if anything, I would we would say is that if electives go up, then we'd have upside here. Quarter. Got it.

Speaker 3

Steve, maybe just to add on to that real quick is that we typically think of this as the variant and the new variant. It's also the combination. We said this in the prepared remarks that there are some specialty staffing challenges in the United States. And so we think it takes a little longer for that to bring to come back. But quarter.

Speaker 3

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, quarter. Those two combinations really showing our strategy play out. So I think we've been a little bit more conservative on the electric side. But I think what we're seeing quarter. 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.

Speaker 3

Got it. Thank you. Quarter. Thank you.

Operator

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

Speaker 5

Quarter. Yes. Hi, Andrew. Hi, how are you? Just a question, sort of a supply chain question for quarter.

Speaker 5

After the tariffs, I think you guys made some adjustments to your manufacturing footprint. As we quarter. Sort of experiencing the supply chain constraints, particularly hitting fluke and tech. What are your thoughts about how to make quarter. The supply chain more resilient going forward.

Speaker 5

Thank you.

Speaker 3

Yes, Andrew. I think number 1, as we said, quarter. Supply chain constraints typically, I would think about that in 2 categories, 1 from a supplier perspective quarter. And the other around freight and logistics. So let's take the supplier side.

Speaker 3

You're certainly right, a number of our countermeasures that we had relative to the tariffs put us into some locations quarter around the world and 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, quarter. When we think about FPG and A, those are components, particularly on the ASIC side, where we've really designed around sole source differentiated technology, quarter. Which has historically given us better margins and better differentiated technology from a product perspective.

Speaker 3

You see that mostly in the higher end products at Fluke and a tech. And that's why sensing didn't have as big an impact relative to this because they tend to use more commercial off the shelf products. Quarter. So we're getting those things changed. We're as you say, it's the question of what we're doing.

Speaker 3

We're qualifying new suppliers. We're redesigning some platform architectures around The ability to source in different places. We're moving some we're moving supply base out of some maybe higher risk COVID locations in the world. And all of those quarter. And will play out in the 4th in the Q1.

Speaker 3

That's where we see the core growth getting a little bit better at both LUKATAKE in the Q1. Quarter. And it continues to improve through the year. So we're not anticipating necessarily a big shift in change relative to the supply side quarter. In the year, what we're really seeing is the benefit of our countermeasures building through the year.

Speaker 3

So that's how we think about it. On the freight side, it's clearly freight lane challenges from Asia to the U. S. And you see some of that in the growth rates in Asia between Asia and the United States. Some of that is impacted quarter.

Speaker 3

By the fact that we just don't have to ship product as far when we're quarter shipping product into Asia than we are into the U. S. So that's a broad swath of the actions that we're taking. Quarter. And it takes a little while to get some of those things all in place, but we'll see that improvement.

Speaker 3

We're seeing that improvement now and we'll see it build throughout the year.

Speaker 5

Quarter. That actually makes a lot of sense. Thank you. And I missed the first couple of minutes, so I apologize if you've answered it. But I'm looking at Slide 13, the total software growth and specifically, quarter.

Speaker 5

If also you could give us a sense, 0ing up, if you want to highlight revenue or ARR, just to see quarter. What's happening there because that's a big part of the growth strategy going forward? Thank you.

Speaker 3

Yes. Total software growth was low double digits quarter. So that certainly has the big our core revenue growth was mid single quarter. And I think really what we saw that was really good was our ARR growth in the 4th quarter was quarter. It's high single digits.

Speaker 3

So I think we saw a good benefit from a number of our strategies playing out both core and certainly with the additions quarter of service channel and probation that gets to the 2022 you're referencing. We'll see that growth be double digit in Q1. Quarter. So we're really seeing, I think, good we saw some good benefits. It takes a little while on the SaaS side for that revenue to impact the full year.

Speaker 3

But as I said, we'll see it in the Q1. Quarter. Feel good about where we're at relative to the core businesses, but also what we had in both quarter probation.

Speaker 5

Fantastic. Thank you very much.

Operator

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

Speaker 8

Thanks. Quarter. And I'll say good morning because it is more than where you are. So just wanted to dig into Fluke and Tektronik. Quarter.

Speaker 8

How did the sell in, does the sell out through the channel play out? Because I'm assuming that the channel once more quarter. There's a big disconnect between the sell through the distribution channels. And any color on where inventories are right now would be helpful.

Speaker 3

Quarter. I think I said this on the Q3 call, but we think about when we think about inventory now, we also think about quarter. Given that we've got a substantial backlog, we're also going to look at what distributors have on order, so that we make sure we quarter and we're pleased to understand relative to true demand versus maybe inventory building on their side. And I think in that regard, quarter. We see good sales out and we don't see big inventory on hand quarter relative to the inventory build.

Speaker 3

So we're seeing a good demand environment relative to both Fluke quarter. And I think it is somewhat impacted by the availability, so high 90s. So I think in general, quarter. We're seeing good demand on the demand front. And I think we're starting to we're seeing that in some of our channel partners' external comments.

Speaker 3

So we feel good about the demand environment where we have distribution businesses on a global basis. Quarter. We saw good sales in. So I think we feel confident about the level of activity quarter. We've got a lot of good innovation, as we highlighted in the prepared remarks in the quarter, and we have really quarter and we're excited about the accelerated innovation in 2022 at both Fluke and Tac, which we also quarter.

Speaker 3

I think we'll have nice impact.

Speaker 8

Yes. I mean, the 3rd question is really more about depletion of inventory rather than light, which I think it probably is.

Speaker 3

Yes. It was.

Speaker 8

Quarter. Yes, that was an acceleration, which seems to be what certainly we're focused

Speaker 4

on. My follow-up question quarter.

Speaker 8

And when do you think Accruent will get back to revenue growth?

Speaker 3

Yes, I think

Speaker 4

quarter. I'll answer that on the software numbers as

Speaker 3

well. While we did have less days in the quarter, quarter and we have a very positive impact relative to the less days. We in some of the guide quarter. The combination of the current Gordian, we sort of think about that. We've moved

Speaker 4

quarter. On a full

Speaker 3

year basis at low double digits, that's probably a little higher at Gordian, but we would see right now we'd see a current quarter for 2022. So we had good ARR growth in the 4th quarter. Quarter. So the combination of the work we're doing, we'll still have some SaaS transition quarter. Because in many cases, we're relying on new logos, a little bit more of a headwind than if we were quarter to FAST like we are at probation.

Speaker 3

So it's that combination of things that we're doing, new logo growth, but at accruent quarter and also just continuing to invest in those high growth opportunities. We talked about it in the prepared remarks, workspace planning as an example, quarter. Our EMS product line, which grew 50% in the year. So it's a combination that's not our biggest product line. But over time, at that growth rate, quarter.

Speaker 3

It inevitably takes over being a bigger part of the growth story. We'll see that starting to play out.

Speaker 8

Great. Thank you.

Speaker 3

Thank you.

Operator

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

Speaker 3

Thank you. Good day, everyone. Good morning, Deane. Quarter.

Speaker 2

Quarter.

Speaker 9

I appreciate right upfront you sized the 50,000,000 quarter and revenue miss quarter related to supply chain, but that's really become sort of a catchall for everyone. Can you give any more specifics either by product line, is it semiconductor related resins, customer readiness, just maybe take us through what the actual blockages were.

Speaker 3

Yes. So I would say first and first, given the fact that I've quarter. I've been on the East Coast time for the better part of 20 years. This is a sign change, but we do listen. Quarter.

Speaker 3

And Elena has been a great add for sure. And we're really excited to call. Talk about the frame that we've got at a time zone that's easier for all of you. I think number 1, then supply chain. Quarter.

Speaker 3

So think of the remaining piece of that as probably COVID related, a chunk of that being electives being lower than we anticipated. Quarter. Let's break that down a little bit. The majority of that is it's Fluke and Tektronix. Quarter and I would say at Fluke and Tek, it's really about quarter.

Speaker 3

And Andrew's question, very much around a big portion of that quarter. It's application specific ICs. Those are technologies that are pretty much dead lines. And the work we do, as I described quarter. The 4 is really the countermeasure to doing that.

Speaker 3

So it's so I will go quarter. I'll go into more detail on that since we already did. But another part of that is what we saw at E and C and the E and C thing is pretty specific to some specific supply quarter and we'll be happy to take any further questions. As well as some customer challenges that I would also say that Has a little bit of you might have seen this in other government people have government contracts on the commercial side and on the military side where quarter. Customers have to come in and develop the liquidity at the end of the year just given COVID.

Speaker 3

So that's a swap of it. But the biggest bucket, the highest parade of our is

Speaker 9

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

Speaker 10

I don't

Speaker 3

know if that backlog is customer quarter. 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 quarter. 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 quarter.

Speaker 3

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 quarter and we're seeing some of the new innovations on the

Speaker 4

2 series, some different products that

Speaker 3

we've talked about. We're seeing quarter. Some of the new innovation on the 2 series, some different probe categories that we mentioned in the prepared remarks, the new 5 series. We're seeing really good customer interest quarter. In those products, it's our book to bill quarter.

Speaker 3

So strong. So we really think the demand cycle for TAC is certainly going to be strong in 2022. And quite frankly, as much as you can get early signs on this,

Speaker 2

quarter on the

Operator

line of Scott Davis with Melius Research.

Speaker 9

Quarter. And Elena, welcome.

Speaker 3

Thanks, Scott.

Speaker 9

Glad to have you back. Hi, Scott. I got one kind of quarter. Bigger picture is not. Is your total quarter.

Speaker 9

Full installed base of boxes higher today than base units higher today than when you bought it. Has that grown at all, Tim?

Speaker 3

Quarter. Yes, we said I think we said, we've had low single digit compounded growth in installed base over the last several years. I think TS Capital quarter. So we've seen growth in the year, which is additional boxes in your term quarter.

Speaker 9

Okay. And then also a clarification. Did you say that when that backlog first half of the year.

Speaker 3

We don't anticipate the backlog in its tax side, quite frankly, Dean or sorry, Scott, we don't see any

Speaker 4

of the growth this year.

Speaker 3

Quarter. We have a really, really strong backlog at Pacific Scientific right now.

Speaker 9

Okay. And then last

Speaker 10

term 4.

Speaker 3

Yes, it's our new innovation tool. It's really a thing historically, it's really from it really applies to both software and hardware. Quarter. It's a new tool that we're deploying in every one

Speaker 4

of the businesses in terms of

Speaker 3

how to look at quarter, early stage innovation as opposed to maybe being maybe slight over the years, we've been maybe a little bit more focused on quarter. I think it brings a new some new concepts around managing not only the things we've got quarter. We're pleased to

Speaker 2

do the next generation of

Speaker 3

things, but also bringing on some new things that really drive full incremental growth based focused quarter and we'll focus on new secular drivers. So over quarter. We should see better returns on our R and D investments. We should see accelerated core growth from those investments as well.

Operator

Quarter and we are

Speaker 4

now open. Hi, everybody.

Speaker 10

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

Speaker 3

Yes, that was a Q4, the 2% quarter overall in Q4 2021. And for what we're thinking, what's embedded in our guide is about 2% quarter for 2022. That's about twice what we would normally get quarter. As in a normal year.

Speaker 10

And on TAC in the recent past, quarter. What's actually driving the increase and should we expect it to move higher in future years?

Speaker 3

Quarter. Well, I think we came into the year I think in 14% quarter. It's the right baseline for us and I think that's pretty good. What guidance that came through usually around quarter. The split from Dan and her that are really hard to predict.

Speaker 3

We don't see any of those going forward. So we a normal, we revert back to that quarter. We don't have 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 there.

Speaker 3

So in 2022, we actually end up with probably a $0.12 headwind versus and that's embedded quarter. So if the R and D tax credit The rate is 16%. Quarter. Yes. So if the R and D

Speaker 10

tax credit gets renewed, extended or whatever, we're likely

Speaker 3

quarter. Coming down a couple

Speaker 10

of 100 basis points on the tax rate, is that right?

Speaker 3

No. I think we anticipate that to get renewed. Quarter. So that's not changing. It's really about what's going on internationally in Texas.

Speaker 10

Is there any, quarter. I don't know disruption or dissynergy going on as service channel comes in, maybe mutual customers where 1 plus 1 isn't equaling to, just any color there? Is that any part of the revenue pressure we're seeing at Accruent?

Speaker 3

Quarter. Not in the quarter. I think as we as I think what's embedded in there could be some moving quarter. Back and forth at this point right now. There's nothing dramatic that's anticipated, Jeff.

Speaker 3

Quarter. I would say what we're seeing though is we are seeing those value I mean, we're getting great visibility into the value propositions of each of those businesses. And I think we have a better sense of selling strategy. And I think we're in a very good place. We may see some challenge between situations over time with customers, but nothing is anticipated from the size.

Speaker 3

And particularly some of the growth drivers, particularly like about things like work space management. No conflict whatsoever. That's really an independent strategy and product line that really resides at Accruent. So quarter. So I think we've got some good levers to pull in the Accruent business.

Speaker 3

And obviously, the broader opportunity that we have with Service channel around the things they do is really great. And I think with the combination of what we do at Gordian and Accruent and some of those overlap It's only going to continue to help us build a better position and value proposition for customers. Great. Thank

Speaker 11

you. Thanks.

Operator

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

Speaker 6

Good morning, everyone.

Speaker 3

Hey, Andy.

Speaker 11

Quarter. Andy? Chuck, you gave some color on the regions, but can you elaborate as to why Europe was significantly worse than your other two geographies in terms of sales quarter. And it seems like supply chain headwinds have been worse for some of your peers than so just curious as to what's going on for you in Europe. And then China seems to be holding up well for you.

Speaker 11

Can you talk a little bit more about your outlook for the key regions in 2022?

Speaker 3

Yes, I think I'll take quarter. Number 1, on the Europe side, we really do have a comp issue in ImbecTec. Last year, ImbecTec had really dramatic growth in the Q4, and that was really a customer in Europe. So quarter. A little bit of a comp situation in Europe as it relates to what we typically see, Andy.

Speaker 3

Quarter. 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. Quarter. We had very strong China growth as we've had very strong China growth around the world all year. And we're really Chuck and I did a review with all of our high growth markets the other day.

Speaker 3

Quarter. And quite frankly, we're hitting on we're really firing on all cylinders relative to the work that the businesses are doing in China. So we would anticipate Continued good growth in China for the year. We think that high growth markets continue to be good. So Asia, quarter.

Speaker 3

Simply because most of our supply base is in Asia for the businesses that have electronics. There's a hardware comment more than a software comment obviously. Quarter. But we do see some impact both in Western Europe and in the U. S.

Speaker 3

Quarter. Because the logistics of getting components out of Asia and into the U. S. And into Europe to our fact in many cases, our factories was a little slowed in the 4th quarter. That improves, I think, over time as some of these freight lanes get a little bit uncongested over time.

Speaker 3

So that gives you a broad swap.

Speaker 2

I quarter.

Speaker 3

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 quarter. ASP was strong outside of the United States and really had that elective impact mostly in ASP. So bringing all that back, supply chain improvements really help us globally, quarter, particularly in U. S.

Speaker 3

And Europe as we go forward here. And as I mentioned in relative to those, some of the activities that we're engaged in relative to improving the supply chain, quarter. They'll obviously impact what I would call our developed markets in U. S. And Europe that probably more predominantly than anywhere else.

Speaker 11

Quarter. Thanks for that, Jim. And then Chuck, you're guiding to relatively normal conversion for Fortive, I think 105% for 2022. Quarter and talk about your confidence that excess inventory is basically peaking now on cash generation as the R and quarter tax credit is non extended.

Speaker 3

I probably have to come back to you on the R and D tax credit if it's Not extended. That'd be surprising, but potentially, I guess, every time until it's renewed, quarter. We put that on there. So let me come in and our follow-up call, I'll add that number for you. From working capital, quarter.

Speaker 3

I think that what will happen here is that supply chain rolls out, we'll get more sales out and our inventory turns will improve. Quarter. And as we talked about also things related to COVID, we expect that receivables come down. That will primarily quarter. I've just seen that improvement in the first puts and takes in our conversion ratio about what can go on there.

Speaker 3

Quarter. There are some things going on with the timing of tax payments there that we're talking 1% or 2% here that can go either way. But quarter. We'd expect normally we start off in Q1 with a conversion and accelerates

Speaker 4

quarter. We're

Speaker 3

probably a little bit ahead of that in Q1, but we won't get over 100% until probably the Second quarter and into the second half.

Speaker 11

Appreciate it, Chuck. Thanks.

Speaker 1

So I know we're coming up a

Operator

quarter. Your last question comes from the line of John Walsh with

Speaker 12

call. Doug, a couple of 2 cleanups. 1, I don't think I heard you talk about kind of the multiples you're seeing in your pipeline. Quarter. Are some of the private multiples resetting like we've seen in the public markets or what does that look like in terms of something maybe breaking free here?

Speaker 3

Quarter. Yes, John. We always say the funnel is pretty good and I would say that that's quarter. Very true. We remain busy.

Speaker 3

The private market tends to lag a couple of quarters here from what you see in the public market. Quarter. They go through all the cycles of denial and things like that. So I suspect we'll as we look at things and quarter. As we continue to be disciplined about what we look at, we will take that into account as we look at things quarter.

Speaker 3

Knowing that potentially it takes a little while for that to occur. And I would say, we feel very good about the 2 deals we've done over the last few months with service channel and then probation closing at the end of the year. So lots to do with those two businesses to really take and help those businesses continue to They're great businesses. We bought great businesses. We've got great opportunity there.

Speaker 3

So we're spending time on making sure they become they get quarter. Great start in Fortive. And we remain disciplined and we'll watch these private transactions. But I do think it will be a couple of quarters before Those valuations start to see themselves hit in the private market.

Speaker 12

Great. And then maybe just a go on to this microcontroller supply chain question. 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 have access to those components that you need versus how much actually needs the supply chain to get healthier as we go through the year. Quarter.

Speaker 3

Well, I think as I said, it's a bit of a there's lots of things going on. We can have we have quarter. Letters from suppliers very often and then they fall down on those. So a good we're going to make it more of our own luck here in the second as we go quarter relative to redesigning, requalifying those kinds of things. And I anticipate with the strong backlog we have, quarter.

Speaker 3

What we put in the guide is a level of confidence with the things we've got. But it is a little bit of hand to hand combat every day on what quarter. 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 quarter. This is not just semiconductor. So we'll continue to prevail.

Speaker 3

I think quarter. We look at our maybe batting average on actions, it continues to improve through the year. And we quarter. We're expected to continue as these countermeasures work, but certainly as we think about things getting better, we don't have a belief that it dramatically gets better. What we really quarter and

Speaker 2

we believe

Speaker 3

that the benefit of the actions that we've been taking, a higher probability of those actions really taking place.

Speaker 12

Great. Thanks for taking the questions.

Speaker 6

Quarter. Thanks, John.

Speaker 8

And I think

Speaker 1

Jim, do you have any

Speaker 3

final comments? Yes. So quarter and hopefully this time works better for you. We and this process works quarter. I know you're in an incredibly busy day and a busy time of the season.

Speaker 3

We appreciate the time and energy that you quarter. Put into spending some time with us. Obviously, we're available for follow-up calls. I quarter. 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 Q4.

Speaker 3

I come back to the 9.5% core growth we had for the year, quarter. The great margin expansion that we've had over a couple of years and quite frankly over a 2 year basis, the strong free cash flow that we continue to demonstrate. Quarter. We walked into 'twenty two, a lot of our strategy playing out in terms of healthcare, a lot of our strategy playing on the software as we described. And I think a lot of the actions we're taking quarter to take advantage of the innovation that we put in some of our hardware businesses, particularly at Fluke and Tack and within sensing.

Speaker 3

So we're incredibly quarter. 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 as we move through the year. Quarter.

Speaker 3

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.

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