Prepared remarks
My name is Daryl, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Second Quarter 2026 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' 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, please press star then the number two. I would now like to turn the call over to Ms. Christina Jones, Vice President of Investor Relations. Ms. Jones, you may begin your conference.
Thank you. And thank you everyone for joining us on today's call. I am joined today by Olumide Soroye, Fortive's President and CEO, and Mark D. Okerstrom, Fortive CFO. During today's call, we present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. We will also make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and actual results might differ materially from any forward-looking statements that we make today. Information regarding these risk factors is available in our SEC filings, including our annual report on Form 10-K and the subsequent quarterly reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements. Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. And our results and outlook discussed today are on a continuing operations basis. With that, I will turn the call over to Olumide.
Thank you, Christina. And thank you all for joining our call today. Let me begin on slide 3. Q2 marked another quarter of strong results and execution of the Fortive Accelerated strategy by our Fortive team. Four key messages from the quarter. First, our teams delivered strong financial performance across both segments. On a consolidated basis, we delivered core revenue growth of 6.7%, adjusted EBITDA growth of 12% and adjusted EPS growth of 28%. Importantly, our results reflect continued progress on our objective of driving faster profitable organic growth powered by our Fortive Business System (FBS) Amplified. Second, we remain disciplined in our capital allocation approach with relentless focus on optimizing shareholder returns over the medium- to long-term. This quarter, we executed a small bolt-on acquisition and deployed another roughly $200 million to share repurchases, bringing total share repurchases since our launch of New Fortive a year ago to approximately 38 million shares or 11% of shares. Third, we continued to execute our Fortive Accelerated strategy, and we are pleased to see evidence that our investments in innovation, commercial, and recurring customer value are contributing to accelerating growth, margin expansion and earnings performance, reinforcing our confidence in our medium-term financial framework and value creation opportunity. Finally, we are raising our full-year 2026 adjusted EPS guidance to $2.95 to $3.05, reflecting our solid first half performance and our confidence in the trajectory of the business. Moving to slide 4, let me highlight some of the progress we are making in executing the three pillars of our Fortive Accelerated strategy. Starting with the first pillar, delivering faster profitable organic growth. Overall, we remain encouraged by the progress we are seeing across innovation, commercial, and recurring customer value, all of which are building the foundation for durable, faster organic growth. This quarter, our accelerating innovation velocity again translated into faster growth. At Fluke, our innovation funnel is steadily expanding, with new product introductions tightly aligned to strategic growth areas such as data centers, defense and early-in-career technicians. Demand for CertiFiber Max continues to exceed expectations, helping establish Fluke's position in the rapidly growing data center commissioning and maintenance market, and driving pull-through of the broader Fluke portfolio into this high-growth area. In Facilities and Asset Lifecycle Solutions, we are expanding our AI-enabled predictive maintenance portfolio, our ServiceChannel and our Accruent including tools that help field service technicians diagnose and fix issues more accurately in the field. At Gordian, our Flash AI solution launched in Q1 is now in production across many of our strategic accounts and running well above plan, cutting construction cost estimating time from days to minutes and creating measurable value for customers and for Gordian. In healthcare, ASP received FDA clearance for a 50-pound expanded load capacity, further strengthening our position in robotic assisted surgery applications, one of the faster-growing areas within the operating room environment. On the commercial side, we maintained our focus on faster-growing end markets and regions where we have made deliberate targeted investments to capture growth. At Fluke, investments in data center expertise drove incremental demand for our networks, power quality and battery testing product lines. Additionally, we continue to see strong momentum in India where our localized service and support investments are strengthening customer relationships and helping drive growth. ServiceChannel is investing in commercial and market resources across Europe to capture the meaningful international opportunity in the business. At Gordian, our investment in growing contractual engagement is reinforcing the competitive differentiation of our two-sided procurement marketplace. In healthcare, we continue to deepen our engagement with enterprise health systems and ambulatory surgical center networks through coordinated commercial efforts across ASP, Censis, and our other advanced healthcare solutions operating brands. On our recurring customer value initiatives, we made further progress on deepening customer lifecycle engagement and improving revenue durability. In Q2, recurring revenue growth remained strong across both segments. At Fluke, recurring revenue growth was driven by strong performance in services and software offerings. Early customer feedback on AI-enabled capabilities recently introduced within Fluke's eMaint platform has been very encouraging. ASP consumables and services had another quarter of strong growth with solid growth contributions from every major region. Moving to the second pillar, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. Consistent with our priorities, we deployed another roughly $200 million to share repurchases in Q2. Since the spin-off, we have deployed nearly $2 billion to share repurchases, representing 38 million shares or approximately 11% of diluted shares outstanding. Our revamped bolt-on M&A engine and team is now in place, and we are continually evaluating opportunities for high-quality accretive bolt-on acquisitions that meet our rigorous strategic and financial criteria. This quarter, we completed the acquisition of a majority stake in UV Smart, an innovative company whose complementary UVC high-level disinfection technology expands ASP's portfolio and enables more efficient disinfection of specialized instruments. Looking forward, our capital allocation priorities remain clear: invest in organic growth, pursue bolt-on M&A where risk-adjusted returns exceed other uses of capital, return capital through share repurchases, and maintain a modest growing dividend, all with a focus on best relative returns and maximizing medium- to long-term shareholder value. Moving to our final pillar, building and maintaining investor trust. We are pleased to deliver strong performance ahead of expectations for a fourth consecutive quarter as New Fortive. We remain laser-focused on executing against our 2026 financial and strategic plan and continue to have strong confidence in our medium-term financial framework that we shared at our last Investor Day. With that, I will turn it over to Mark to walk through our financial results for the second quarter in more detail.
Thanks, Olumide. Begin with Slide 5. In the second quarter, we delivered total revenue of nearly $1.1 billion, up almost 8% year-over-year on a reported basis and up 6.7% on a core basis. We were pleased to see price and volume growth again in both segments, with results driven by healthy customer demand and strong commercial and operational execution across the portfolio. Software-related revenue remained a meaningful contributor to growth in the quarter, reflecting the underlying strength of our businesses and robust customer demand for our increasingly AI-driven new product releases. Regarding core growth by geography, North America saw modest sequential acceleration in Q2 and continues to be our strongest performing region. Revenue in the Europe, Middle East and Africa region declined modestly due to macroeconomic uncertainty associated with heightened geopolitical tensions and continued economic softness across the region. Pressure in EMEA was more than offset by year-over-year growth and sequential acceleration in APAC and LatAm, driven by strong demand for Professional Instrumentation and healthcare consumables. Adjusted gross margin was 63% in the quarter, down approximately 100 basis points year-over-year. Adjusted gross margin performance was primarily driven by product mix dynamics, resulting from outsized growth in certain lower-margin products, partially offset by operating leverage. Note that tariffs had a minimal impact this quarter as the prior year Q2 also reflected tariff-related costs for most of the period. Q2 adjusted EBITDA was $323 million, up 12% year-over-year. This strong performance was driven by adjusted gross profit growth, operating leverage and discrete structural cost savings, partially offset by growth investments to support our Fortive Accelerated strategy. Adjusted EBITDA margin in the quarter expanded by approximately 110 basis points year-over-year to 29.5%. We delivered adjusted earnings per share of $0.74 in Q2, up over 28% year-over-year, marking our fourth consecutive quarter of double-digit adjusted EPS growth. Strong adjusted EPS performance in Q2 was driven by growth in adjusted EBITDA, and the positive year-over-year impact of share repurchases. We generated roughly $270 million of free cash flow in the second quarter with our trailing 12-month free cash flow topping $1 billion with conversion on net income well north of 100%. Please note that during the quarter, we recognized a $4.5 million IEEPA tariff refund benefit in GAAP earnings. We expect another roughly $20 million to $25 million of tariff refunds in the coming quarters. To help investors more easily compare results across periods, we exclude the impact of IEEPA tariff refunds from our adjusted metrics and expect to continue doing so going forward. But the cash benefit is very real, and will be deployed using our disciplined capital allocation framework. Moving to our segment results, starting with Intelligent Operating Solutions on slide 6. Revenue for this segment grew about 9% on a reported basis, with core revenue growth of 7.4%, and we are pleased to see broad momentum continue across the segment. Core growth was driven by both price and volume, reflecting solid performance across Professional Instrumentation, facility and asset lifecycle solutions and gas detection products. At Fluke, order volume remained strong with order growth modestly outpacing revenue growth during the quarter. Customer demand continues to be robust across our industry-leading portfolio and across a broad set of geographies. Our Fluke team executed with discipline across the board while increasing investments aimed at further tapping into key high-growth end markets including data centers and defense. North America remained our strongest growth driver, with broad-based contributions across product lines. While performance in Europe was affected by macroeconomic uncertainty, this was more than offset by strong growth in APAC and LatAm, where increased commercial investments in strategic growth markets are yielding promising early results. Growth in Facilities and Asset Lifecycle Solutions was strong again in Q2, led by strong performance in multisite facility maintenance and marketplace software in North America. We continue to see evidence that our commercial and innovation investments are driving increased demand for our increasingly AI-enhanced products. Our gas detection business is growing nicely, buoyed by strong demand for our hardware-as-a-service product line in North America, the Middle East, and Latin America. Adjusted gross margin in this segment was just over 65%, down about 100 basis points year-over-year, primarily due to strong growth for some of our lower-margin products serving multisite retail customers, partially offset by operating leverage. Q2 adjusted EBITDA in the segment grew 12% to $264 million, driven by adjusted gross profit growth, operating leverage and discrete structural cost savings, partially offset by growth investments. Adjusted EBITDA margin for Q2 expanded by about 100 basis points year-over-year to just under 35%. Moving to our Advanced Healthcare Solutions segment on slide 7. We delivered total revenue of nearly $340 million. Revenue grew 6% year-over-year and 5.3% on a core basis. Q2 growth was driven by solid demand for healthcare consumables, services, and software in Latin America, APAC, and North America. Our software products in the segment continue to deliver strong growth driven by effective execution and strong provider demand for our gastrointestinal case documentation solution. Low-temperature sterilization capital demand improved modestly again in Q2 and contributed to growth. Adjusted gross margin in the segment was roughly 58%, down about 110 basis points year-over-year, reflecting product mix dynamics and strategic growth investments partially offset by operating leverage. Q2 adjusted EBITDA in the segment was $88 million, up 3% year-over-year, driven by adjusted gross profit growth, operating leverage and discrete structural cost savings partially offset by growth investments. Adjusted EBITDA margin contracted by about 80 basis points year-over-year, while remaining a healthy 26%. Turning to slide 8, our balance sheet remains strong. We finished the quarter at 2.7x gross debt-to-adjusted EBITDA, modestly delevering from last quarter. As noted earlier, we deployed roughly $200 million to share repurchases in the second quarter, reflecting our continued focus on deploying capital with a laser focus on driving best relative risk-adjusted returns and confidence in our ability to deliver on our value creation plan. As a result, we had approximately 307 million diluted shares outstanding at the end of Q2. In terms of M&A, we completed the acquisition of a majority stake in UV Smart towards the end of Q2, and the execution of our value creation plans for the two small bolt-on acquisitions we completed in Q4 of last year are both going according to plan. We continue to evaluate high-quality, accretive bolt-on deals that meet our rigorous strategic and financial criteria and deliver superior returns relative to alternative uses of capital, and we now have the team and processes in place to execute effectively on our M&A strategy. We have a healthy balance sheet and a growing business with high durability, strong margins, low capital intensity, and very attractive free cash flow generation characteristics. All of this gives us ample capacity to execute on our capital allocation priorities with a relentless focus on optimizing shareholder returns over the medium- to long-term. Moving to slide 9, we are raising our full-year 2026 adjusted EPS guidance range to $2.95 to $3.05, reflecting solid first half performance and confidence in the trajectory of the business. This outlook assumes a continuation of the market dynamics we experienced in Q2 and reflects current tariff rates. Now let me provide some additional considerations to assist with modeling. Based on current foreign exchange rates, we now expect full-year reported revenue of approximately $4.35 billion. Given solid performance to date, we now expect full-year core growth of approximately 4%, up from our prior expectation of 2% to 3%. In terms of the shape of the balance of the year, we expect Q3 reported revenue as a percent of total to be broadly in line with historical patterns, while Q4 will be a smaller-than-usual percentage due to there being four fewer selling days in the quarter versus prior year. As we mentioned last quarter, this will also drive about a $15 million to $20 million headwind to reported revenue and a 150-basis-point headwind to core growth in Q4. We expect FX and M&A combined to be about a 50-basis-point tailwind to reported revenue. In each of Q3 and Q4, we are expecting Q3 adjusted EBITDA margin to be slightly below Q2 levels, driven by slightly lower revenue on an absolute basis and the impact of modest strategic growth investments. On a year-over-year basis, EBITDA margin trends will also be impacted by a more difficult Q3 OpEx comparable. We now expect a Q3 effective tax rate in the mid-teens and Q4 in the low double-digit range, and full-year net interest expense of about $140 million. From a bottom-line perspective, as we look forward to the balance of the year, as has historically been the case, we expect adjusted EPS delivery to be weighted towards the fourth quarter with Q3 EPS up very slightly year-over-year. As we said last quarter, broadly consistent with what we saw in the first quarter of this year. As the balance of the year unfolds and we continue to execute on our Fortive Accelerated strategy, quarterly phasing may evolve. As a final note before turning it back to Olumide for closing remarks and Q&A, our first half results reinforce our confidence in the Fortive Accelerated strategy and financial framework we outlined at our last Investor Day, and we remain focused on delivering benchmark-beating returns for our shareholders. I will now turn it back over to Olumide. Thanks.
Let me close with a few observations on the quarter and where we are headed. Q2 represented another strong quarter of performance. We delivered 6.7% core growth, approximately 12% adjusted EBITDA growth and 28% adjusted EPS growth — our fourth consecutive quarter of delivering double-digit adjusted EPS growth and exceeding expectations. One year after our launch of New Fortive, we are generating momentum from our Fortive Accelerated strategy, and our confidence in the 2026–2027 financial framework we outlined at our last Investor Day is fully intact. We are pleased with the progress we have made. We believe we are still in the early stages of realizing Fortive's full potential, and we are excited about the value creation runway ahead of us. I want to thank our customers for placing their trust in us every day, and all our Fortive team members around the world for their commitment to our shared purpose of innovating essential technologies to keep our world safe and productive. With that, I will turn it back to Christina to open the call for questions.
Thanks, Olumide. That concludes our prepared remarks. We are now ready for questions.
Questions and answers
Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) A moment, please, while we poll for your questions. Our first questions come from the line of Scott Davis with Melius Research. Please proceed with your questions.
Hey, Olumide, Mark and Christina. Good morning. I think it is still morning there, so good morning to you. I wanted to touch on two things. The first being new products and the second being bolt-ons. On new products, when you talk about NPIs and the KPIs around that you look at internally, are new products having a tangible impact on top-line growth? Or sometimes you see it in price or margins because you are selling something iterative. But is there a tangible sign that you think you're getting a return there?
Well, thanks for the question. I think short answer is yes, absolutely. We have been really clear in our Fortive Accelerated strategy that the three vectors that would drive this company to grow faster are: first, innovation and new products; second, commercial; and third, recurring customer value, which means we do more for the 100,000 customers who trust us every day. What we have seen from a product innovation point of view is all 10 of our brands have been introducing products and have a funnel of new products that is deeper and richer than we have ever had, and that is also more pointed at high-growth vectors. The fact that we are growing 6.7% core this quarter and we have been accelerating the last four quarters certainly has the fingerprints of those new products on it. We have talked about some examples at Fluke with CertiFiber Max, and ServiceChannel with some of the AI-enabled innovations we have introduced for work order anomaly detection and conversational work order completion, among other things. We have extensive instrumentation on how we track the portfolio of new products and each individual product in terms of what we expect and what we are delivering, and we feel quite good about what we are getting out of them.
Fair enough. And then on the bolt-on side, are there limitations — particular businesses you would not want to bolt on to, or areas you have limited interest in expanding? Are you looking at bolt-ons across the entire portfolio — software, not software, healthcare, non-healthcare? Any sense of priorities and where we might expect to see the lion's share of bolt-ons?
Yeah. We have a much simpler portfolio today. If you think about the company, Fluke is more than 40% of what we do, ASP is another big chunk, and then there's the rest of the company. So the surface area where we look for bolt-ons will skew towards our strongest platforms — Fluke and ASP are good examples. While we do not exclude any area, we are generally building a funnel that looks at what is available and what is strategically and financially interesting for each of our brands. You are going to see us skew towards our strongest brands. On software, we like the software brands we have because of attributes like proprietary data, regulatory lock-in and two-sided networks. If we are looking to bolt-on software, it has to have those attributes and meet our financial return criteria. So software bolt-ons are possible, but it is a narrow path to find something that works and is affordable. You will therefore see deals skew towards our biggest brands and more towards differentiated hardware businesses.
That makes a lot of sense. Okay. I will pass it on. Best of luck.
I appreciate it.
Thanks, Scott.
Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question.
Thanks. Good morning, everyone. I wanted to clarify your comments on Q3 — you mentioned revenue and margin down modestly sequentially, which sounds like normal seasonality. Also, you discussed the tax between Q3 and Q4. I think you said mid-teens in Q3 and low double digits in Q4. Are you still on track for a mid-teens tax rate for the full year? Also, I wanted to ask about the mix headwinds you called out, especially within ASP. How persistent is that? And then beyond that, any color on memory chip inflation — is that weighing on conversion rates in the back half of the year?
I think you have it right. Q3 revenue should follow normal seasonality and be a sequential step down. We continue to expect something in the mid-teens on a full-year basis for the tax rate, with mid-teens in Q3 and low-double-digits in Q4. On gross margin, mix shift was a big driver in both segments. Specifically in AHS, mix shift was driven in part by resumed growth in the capital part of ASP and some strategic investments against larger accounts that impacted gross margins. In iOS, mix shift predominantly impacted gross margins due to strength and high growth in some lower-margin products, notably strategic products in ServiceChannel. Regarding inflation and memory chips, FBS is effective at offsetting these pressures. We had price-cost positive for us in the quarter. There are projects the teams are working on to ensure multiple sources for components such as rare earths and memory chips. It is not a material factor in our results at this point in converting orders or in backlog to revenue, but it is something we are actively working to mitigate.
Okay. Thanks, Mark. Appreciate the clarity, and adjusting out the tariff benefits makes comparison easier. Thanks a lot.
Thank you.
That is our goal — make your life easier.
Thank you. Our next question comes from the line of Deane Dray with RBC Capital Markets. Please proceed with your question.
Thank you. Good day, everyone. Olumide, I was interested in your prepared remarks where you walked through all the new AI products in your software offerings. This, as far as we are concerned, is important proof points on AI as an asset rather than a threat. Could you step back and give us a sense of where Fortive is in the rollout of these AI features? Can you size the investment you have made? And how do you measure enhanced functionality and benefits?
Yes, Deane. For context, we started with an AI Center of Excellence seven years ago, before generative AI became more prominent. That head start, along with long-term partnerships with some top companies, gave us an advantage. Across our six software brands, we have quickly identified high-value use cases for AI that deliver measurable returns for customers — in some cases saving customers millions, and in others materially improving outputs. Our teams have deployed these capabilities quickly across our brands. Adoption has been very strong; for example, eMaint had encouraging feedback on AI-enabled capabilities. We capture value in multiple ways: explicit additional sales customers pay for, outcome-based models, pass-through token costs plus markup, and improvements in net dollar retention by deepening account engagement. Because our AI efforts began years ago, the incremental investment has not been significant; we scaled existing capabilities, added capacity in India, and leveraged partner relationships for favorable pricing on additional tools. We have strong instrumentation via FBS to track returns on each AI initiative. Overall, our software businesses have benefited from AI, and we feel good about the setup and the returns.
Great. And as a follow-up, could you give an update on Fluke? Any color on sell-in versus sell-through and channel inventory?
Yes. Fluke had another terrific quarter with broad-based strength across product lines and across both volume and price. We are gaining share and capturing price. North America remained our strongest growth driver with sustained strong point-of-sale sell-through. Europe was affected by some macroeconomic uncertainty, but POS in Europe was actually the best we've seen in six quarters, reflecting some channel customers deferring purchases rather than weak end demand. That leaves us with a much better channel inventory position. APAC and Latin America both posted solid growth at Fluke, reflecting the increased commercial investments we have made in those regions. Orders grew modestly faster than revenues, so book-to-bill was nicely above one. The team continues to drive an excellent innovation funnel and exceptional commercial intensity, focusing on high-growth verticals like data centers, defense, and early-in-career technicians. We feel very good about Fluke's trajectory.
Great. Thank you for all the color.
Thanks, Deane.
Thank you. Our next question comes from the line of Andy Kaplowitz with Citi. Please proceed with your question.
Hey, good morning, everyone. Olumide or Mark, AHS growth continued to be solid in Q2. Could you talk about what's going on between consumables, where growth seems strong, and capital equipment, where growth has been more modest? Are tight hospital CapEx budgets still slowing capital demand? Are they improving? What's the outlook?
Thanks for the question. We are very happy with what we saw in the AHS segment and in ASP. The strength was broad-based. In ASP, the consumables and services business grew in every major region, with particular strength in APAC and Latin America. The hospital budget pressure that slowed capital procurement in the past has continued to improve, and the capital business returned to growth this quarter. The commercial pipeline remains strong and healthy. Software in the segment also continues to deliver strong growth, led by Provation and our SaaS sales in North America. Overall, it was a great quarter because the strength was broad-based across regions and components of the business.
Very helpful. And last quarter you said FAL growth was accretive to the segment. Is that still the case? And could you clarify what you're seeing between ServiceChannel, Gordian and Accruent?
Yes. FAL had a great quarter overall, led by ServiceChannel, which benefits from robust demand in multisite facility maintenance solutions and marketplace software. Gordian had a solid quarter, especially important given Q2 seasonality with some state and local government activity. Accruent continues on its improvement trajectory. So FAL delivered really strong growth with contributions across Fluke, gas detection, ServiceChannel, Gordian, and Accruent.
Appreciate all the color. Thanks.
Thank you. Our next question is coming from the line of Chris Snyder with Morgan Stanley. Please proceed with your question.
Thank you. I wanted to ask about back-half margins. I understand corporate is a headwind into the back half, but it seems like the segments are calling for flat to down margins into the back half. Is that right? Are drivers mainly investment, gross margin pressure, or something else? Any color on segment margins would be helpful.
Happy to provide more color. We continue to operate within our 50 to 100 basis point EBITDA margin expansion framework on an annualized basis, and I would expect that to hold for this year. There are a lot of puts and takes quarter by quarter. For Q3, we indicated some EBITDA margin pressure driven by a tougher Q3 comparable from last year and mix shift dynamics on a gross margin basis across both segments. Q3 is a smaller revenue quarter and when we run tactical, high-return investments, that can put pressure on margins. On corporate costs, think about corporate at roughly $26 million to $27 million per quarter — there was a small step up this quarter related to mark-to-market on incentive compensation. As you look to Q4, you should see a better margin outlook versus Q3.
Thank you. Also, on Fluke, you have been talking about data center opportunities for a couple quarters. Is something new happening in data center? Is it new innovation or products, like fiber testing, that are showing up now and driving stronger demand?
Fluke participates in many end markets, and data centers have always been part of what we do, but not the only focus. Fluke has a broad set of tools used in data center commissioning, operations and maintenance — from power quality monitoring to high-voltage diagnostics and high-density fiber testing. What is new is that Fluke's team has recently launched targeted innovations aimed at data center use cases, and those products have created pull-through for our existing portfolio. CertiFiber Max is a good example: it certifies high-density fiber cables much faster than prior tools, and demand for it is well above plan. That accelerated demand is now pulling through other Fluke products in the data center market. So data center isn't new to Fluke, but we have been able to leverage existing strength plus focused innovation and commercial intensity to benefit from momentum in that market.
Great to see that coming together and driving organic growth. Thank you.
Thanks.
Thank you. Our next question comes from the line of Andrew Buscaglia with BNP Paribas. Please proceed with your question.
Hey, good morning everyone. I wanted to touch on recurring revenue. Manufacturing complexities are increasing in areas like semis, aerospace and life sciences. Are you seeing changes in how customers calibrate or use equipment that could increase wear-and-tear and require more frequent upgrades or repurchases? Is that a new dynamic for Fortive?
That trend has been building for several years. Customers are evolving how they calibrate and service higher-end tools — frequency, who performs calibration, and whether they use us or third parties. We are seeing customers more interested in full-lifecycle offerings from Fluke: calibration plans, service plans and software that improve productivity across a tool fleet. Recurring revenue at Fluke has been growing double-digits for many quarters, and this demand to attach recurring services to a large installed base is a great opportunity for durable revenue growth.
As a follow-up, how does that inform where you go with growth or M&A? Some might argue hardware and instruments are becoming more important, others might say software applications and asset optimization are crucial. Where is the more interesting place to go to set up growth over the next five years?
We go where we have the strength and the right to win. If we see software that can attach to our extensive hardware footprint and can scale across our installed base, that's very interesting because it provides a unique commercial advantage. If we see differentiated hardware aimed at attractive end markets, that's also compelling because it extends our installed base. Given our footprint — more than 70% differentiated hardware, about 20% software and services — we will skew toward hardware in M&A, but any software we pursue must have a clear advantage to our natural strengths and a path to scale.
Okay. Thanks.
Thanks.
Thank you. Our next question comes from the line of Quinn Fredrickson with Baird. Please proceed with your question.
Thanks. On ASP, there is mixed feedback about the impact of ACA expiration on elective procedures. Are you seeing any impact or do you expect any impact on capital equipment or consumables demand based on your conversations with customers?
The healthcare reimbursement environment has been dynamic, but we have strong proximity to customers and insight into their decision processes. The impacts you're asking about are comprehended in how we think about ASP. Q2 of last year was an epicenter of holdbacks; that has been opening up as hospitals prioritize enabling operating rooms. We are seeing order flows return and expect that to continue as procedure volumes recover. Investments like the UV Smart bolt-on expand our value proposition. Overall, we feel well positioned at ASP.
Thanks. On the FDA clearance you mentioned, can you expand on what that means? Will it enable you to go after new robotic surgery OEMs or other customers?
This clearance is for our low-temperature sterilization capital equipment — STERRAD — allowing an expanded load capacity up to 50 pounds. Many robotic surgical instruments fall into that weight range, so the approval increases our addressable market for robotic surgery sterilization. That will improve our win rates, expand the funnel and drive growth in that part of the business.
That is helpful. Thank you.
Thank you. Our next question comes from the line of Jamie Cook with Truist Securities. Please proceed with your question.
Hi, good morning. Two questions. On guidance, it looks like EBITDA margin expansion this year might be nearer the lower end of the 50 basis points. Can you confirm? And longer term, given the investments — in particular in AHS — when should we expect to see payoffs and margin setup for 2027?
I would start by saying we are happy with the margins. Gross margins at 63% and EBITDA around 30% this quarter are good indicators of the strength of the brands, differentiated products and FBS. We continue to operate within the 50- to 100-basis-point annualized EBITDA margin expansion framework and expect to do so through 2026 and into 2027. The investments are tactical and focused on high-return initiatives across the three pillars of Fortive Accelerated. While we saw some margin pressure this quarter from stronger growth in lower-margin products, many of the products we're launching, like CertiFiber Max, are highly differentiated and command premium pricing. Over time, FBS drives cost reductions and margin improvement. Overall, we feel good about the margin trajectory for gross margin and EBITDA.
Thank you.
Thank you. Our next question comes from the line of Chigusa Katoku with JPMorgan. Please proceed with your question.
Hi, good afternoon. Following up on margins, I see you trending toward the lower end this year. Could you give a bit more color on why you could do more in the 50–100 basis points in 2027? Also, is it directionally correct that Q3 organic growth should be around the full-year range of approximately 4%?
The 50- to 100-basis-point framework is a rollover guidance we use to guide investment decisions. We are investing tactically in high-return initiatives across the Fortive Accelerated strategy. We have seen four quarters of sequential growth acceleration and we now expect full-year core growth around 4%, which is at the higher end of our prior guidance. That growth gives us opportunity for margin expansion as well as room for investments. On Q3, there are comparable and calendar impacts across the year — Q1 had four extra selling days which was a ~150-basis-point tailwind, and Q4 will have four fewer selling days which is a ~150-basis-point headwind. Q3 looks more normalized. The important point is the business is gathering momentum and the trajectory is accelerating.
Okay, thanks for the color.
You are welcome.
Thank you. We have reached the end of our question-and-answer session. I would now like to hand the call back over to management for any closing comments.
Well, thank you, everyone, for your interest in Fortive. We are excited about the acceleration in our business over the last year. Our entire organization is aligned and energized about our Fortive Accelerated strategy and our Fortive Business System that is enabling us to execute that, and we are laser-focused on delivering a strong 2026 and setting the foundation for an even stronger performance and shareholder value creation in the years ahead. Thank you for joining us today and we look forward to speaking with you next quarter. Have a great day.
Thank you so much, ladies and gentlemen. This does now conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.