My name is Erica and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's third quarter 2020 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.

[Operator Instructions]. I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr. Whitney, you may begin your conference..

Thank you, Erica. Good afternoon everyone and thank you for joining us on the call. With us today are Jim Lico, 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.

Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading, Financial Information.

We completed the divestiture of the Automation and Specialty Business on October first, 2018 and accordingly have included the results of the A&S Business as discontinued operations for historical periods. The results presented on this call are based on continuing operations.

During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis.

During the call, we will make forward-looking statements within the meaning of the Federal Securities Laws, 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 uncertainties and actual results might differ materially from any forward-looking statements that we make today.

Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our Annual Report on Form 10-K for the year ended December 31, 2019 and 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. With that, I would like to turn the call over to Jim..

Thanks Griffin and good afternoon everyone. We are pleased with our third quarter results as strong execution across the portfolio delivered a topline performance that was significantly better than our initial guidance as well as a return to year-over-year growth in adjusted operating profit and adjusted earnings per share.

For the quarter, we reported adjusted diluted net earnings per share of $0.94, an 8% increase year-over-year. While the operating environment remained challenging in Q3, we continued to successfully navigate the near-term headwinds.

By leveraging the Fortive Business System, we increased core operating margins by 160 basis points and generated another quarter of strong free cash flow while prioritizing growth investments across our portfolio to drive continued share gains.

On October 9, we completed the successful spin-off of Vontier Corporation, a global industrial technology company focused on mobility infrastructure.

I am extremely proud of the effort and the focus shown by our team throughout the year leading up to the separation and I am very excited about the future opportunities that lie ahead for both companies.

The ability to maintain our readiness and execute this complex transaction despite the obvious challenges presented by the COVID-19 pandemic is a testament to the resilience and adaptability of our people and the power of FBS.

As separate companies, Fortive and Vontier are both well-positioned to execute against their strategic priorities to generate increasing value for all our stakeholders. With the spin-off of Vontier complete, Fortive is well-positioned as a provider of essential technologies for connected workflow solutions across a range of attractive end-markets.

We have strong established positions with leading brands that benefit from long term secular growth drivers and have opportunities to increase recurring revenue.

We have a long track record of disciplined capital allocation, significant balance sheet capacity and free cash flow and substantial opportunities for both organic investment and strategic M&A across the portfolio.

Most importantly, we have the Fortive Business System, the cornerstone of our culture and an enduring source of competitive advantage that underpins our commitment to continuous improvement. Since Vontier was part of Fortive throughout the third quarter, the financial results that we will discuss today include the Vontier businesses.

However, because Vontier will be reporting their third quarter results on Thursday, on today's call, we will focus our commentary on the businesses that remain with Fortive. Also, the guidance that we provide today will be for Fortive's continuing operations only. With that, let's turn to the details of the quarter.

Adjusted net earnings were $338.5 million, up 8.8% from the prior year and adjusted diluted net earnings per share were $0.94. Total sales increased 2.3% to $1.9 billion, with core revenue essentially flat, reflecting significant sequential improvement from the prior quarter.

Acquisitions contributed 220 basis points of growth and favorable foreign currency exchange rates increased growth by 20 basis points. Adjusted gross margins were 51.8% in the third quarter, increasing 50 basis points year-over-year.

Gross margins benefited from 50 basis points of price, the growing contribution of our higher margin software businesses and disciplined supply chain execution. We also generated 160 basis points of core operating margin expansion, resulting in an adjusted operating profit margin of 22.7% for the quarter.

Our ability to drive strong core OMX despite the significant ongoing challenges posed by the pandemic reflected the solid execution of our teams and the disciplined application of FBS.

We continue to effectively manage the business through this uncertain environment, flexing cost actions as needed while also investing in our strategic product development and innovation priorities to position us well for the future.

During the third quarter, we generated $455 million of free cash flow, representing conversion of 134% of adjusted net earnings and an increase of 31% year-over-year. This performance took our year-to-date free cash flow up to approximately $1.1 billion, representing a year-over-year increase of approximately 48%.

Despite a challenging environment over the past few quarters, our operating companies continue to use FBS to manage their working capital effectively in the short term, increasing inventory turns and limiting the headwinds from the sequentially improving topline. Turning to our segments.

Professional instrumentation posted a total revenue increase of 0.9%, despite a 3.5% decline in core revenue. Acquisitions contributed 370 basis points, while favorable foreign exchange rates increased growth by 70 basis points. Core operating margin increased 90 basis points, resulting in segment-level adjusted operating margin of 22.8%.

Industrial technologies performed well in Q3, driven in particular by the North American businesses of both Gilbarco Veeder-Root and Matco. Total revenue increased 4.5%, including a 5.5% increase in core revenue. Core operating margin increased 290 basis points, resulting in segment-level adjusted operating margin of 25.9%.

On slide nine of today's presentation, we show the region-by-region breakdown for the third quarter. Note that the growth rates shown on the slide reflect consolidated Fortive Q3 growth, which includes the results of the Vontier businesses. That said, we will focus our operating company color primarily on the businesses that remain with Fortive.

In Asia, core revenue declined low single digits despite mid single digit growth in China. Strength in China was broad based, highlighted by mid-teens year-over-year growth at Fluke, double digit growth at advanced sterilization products and greater than 20% growth in Sensing.

Western Europe core revenue declined mid single digits in Q3, highlighted by low double-digit growth at ASP. ASP has reported year-over-year growth in each quarter of 2020 thus far, driven by solid sales execution.

Accruent also delivered a strong quarter in Western Europe led by Meridian, its engineering information management solution, reflecting the momentum the company has built in the region.

While point-of-sale remained negative for both Fluke and Tektronix, the point-of-sale trend improved throughout the quarter and revenue at these businesses increased mid teens versus the prior quarter. North America core revenue grew low single digits in Q3, showing broad-based sequential improvement versus Q2.

Growth in North America was led by a strong quarter for the Vontier businesses. At new Fortive, a number of the software businesses continued to perform well with growth across Intelex, eMaint and Censis. Industrial Scientific's iNet business and Qualitrol also performed well.

As in Western Europe, Fluke and Tektronix saw improving point-of-sale trends, though still negative as we turn the corner into Q4.

In recent quarters, we have laid out a framework for analyzing our portfolio with businesses organized into groups based on the relative sensitivity to pandemic-driven disruption and resulting deterioration in end-market demand. On slide 10 of today's presentation, we show the portfolio of groupings with an emphasis on the new Fortive portfolio.

As shown on slide 11, the relative performance of these groups largely played out as expected in the quarter. Group I, which represented approximately 20% of new Fortive revenue in Q3, continued to show significant resilience, posting low single digit growth.

The group's performance again reflected a solid contribution from the software businesses, highlighted by high single digit growth at Intelex, which is seeing continued robust growth in North America and is benefiting from the successful execution of the company's expansion into Western Europe.

Elsewhere, Censis posted low single digit growth, underpinned by the momentum of its SaaS offerings. Accruent also benefited from the resilience of its SaaS business, which increased slightly in the quarter with continued growth in annual recurring revenue based on improving churn and increased net retention.

Fluke industrial imaging had another strong quarter, although its growth moderated as some of the initial COVID-related demand began to level off. Gordian saw slowing in project work among state and local governments and higher education customers, leading to a low single digit decline for the quarter.

Meanwhile, despite continued strong order flow, EMC registered a mid-teen decline due to certain COVID-related supply chain issues and some customer delays. Group II, which represented approximately 32% of new Fortive revenue in Q3, recorded a low single digit decline.

ISC's iNet subscription business posted a high single digit growth, while Fluke Health Solutions showed mid single digit growth driven by ventilator tester tailwinds and support from Landauer's high recurring revenue business model.

ASP reported a mid single digit decline due to a mid single digit decline in North America and pressure in Japan, which saw a resurgence of COVID cases and an associated reduction in elective procedures. However, we were very pleased to see this partially offset by strong growth in both China and Western Europe in the quarter.

We now estimate that elective procedures in the U.S. are back to approximately 90% of pre-COVID levels and are back to approximately 95% in both China and Europe. Group III, which represented approximately 12% of new Fortive in Q3, saw a high single digit decline in the quarter.

While the Sensing portfolio declined by mid single digits, this represented sequential improvement versus the second quarter. Semiconductors and electronics continued to be a bright spot for Sensing, which also benefited from COVID-related tailwinds in medical end-markets.

Elsewhere in Group III, Accruent's professional services and licenses business lines saw an ongoing negative impact from continued delays in accessing customer sites.

Group IV, which represented approximately 36% of new Fortive Q3 revenue, declined by high single digits in the quarter but saw a meaningful sequential improvement and performed ahead of our forecast. Both Fluke Industrial and the Tektronix Instruments business saw broad-based sequential improvement.

Fluke Industrial decreased by low single digits, paced by Fluke Calibration, which registered mid single digit growth. The performance of the Tek Instruments business was highlighted by Keithley, which recorded mid single digit year-over-year growth.

The business also saw improved order activity as the quarter progressed, including initial orders for the new six and eight channel versions of the 6-series oscilloscope.

While we are encouraged by what we saw at both Fluke Industrial and the Tektronix Instruments business in the third quarter, we remain watchful of key macro trends as we continue to work our way toward a return to year-over-year growth at both businesses.

Since the end of the second quarter, we have continued to reduce our net debt with our strong free cash flow and the proceeds received from the Vontier separation. Including the recent proceeds from Vontier, our net debt is now approximately $2.8 billion, down from over $5.1 billion at the end of 2019.

As we look ahead, we expect to continue to generate solid free cash flow, which will enable us to reduce our net debt further. We also expect to monetize our remaining 19.9% stake in Vontier in a tax-efficient manner, with timing subject to market conditions.

While Q3 saw a continuation of the better operating performance that started as the economic lockdowns lifted back in the spring, we remain watchful of macro conditions in light of the continued fight against the COVID-19 pandemic. In Q4, we expect the total revenue will increase zero to 3% on a year-over-year basis.

We also expect to deliver incremental margins of approximately 35%. Finally, we are planning to execute approximately $30 million of strategic productivity initiatives before the end of the year, in line with our prior expectation that some of the temporary actions we executed early in the year would be made permanent as we turn the corner into 2021.

Now that the Vontier spin-off is complete, on slide 12 of the presentation, you will see that we have organized the portfolio into three segments which we will provide the basis for our financial reporting going forward.

The resegmentation highlights the strong position we have assembled to provide essential technologies for connected workflow solutions across a range of attractive end-markets. This view also helps to frame how we think about our portfolio from the perspective of both organic and inorganic opportunities. Details on the segments are as follows.

The Intelligent Operating Solutions segment includes Fluke, Industrial Scientific, Intelex, Accruent and Gordian and represents approximately 40% of new Fortive total revenue.

This segment provides solutions to accelerate field and facility safety, reliability and productivity as well as operating intelligence to a range of end users and addresses a total available market of greater than $15 billion.

Precision Technologies segment includes Tektronix, Pacific Scientific EMC and the Sensing businesses, which will now also include Qualitrol and represent approximately 35% of new Fortive total revenue.

This segment provides mission-critical technologies that enable our customers to accelerate the development of innovative products and solutions and addresses a total available market of greater than $10 billion.

The Advanced Healthcare Solutions segment includes Advanced Sterilization Products, Fluke Health Solutions, Censis and Invetech and represents approximately 25% of new Fortive total revenue.

This segment provides solutions that enhance patient safety, prevent hospital infections, deliver operating efficiencies and accelerate healthcare system innovation and addresses a total available market of greater than $5 billion.

Importantly, we will report on this basis from the fourth quarter onward and plan to issue supplemental financial information in the coming weeks that aligns with this resegmented view of the portfolio so that you can rebase your models.

Before we wrap up, I want to quickly express my appreciation to the Fortive and Vontier teams for their continued effort and strong execution in 2020. This has undoubtedly been an extremely difficult year, but our performance in the third quarter highlighted once again how our team continues to rise and meet the challenge.

With the strong support of FBS, we managed to complete our final preparations for the spin-off of Vontier while also navigating the challenging macro environment to deliver improved topline performance and another quarter of strong free cash flow.

While we face an uncertain environment in the near term, we will continue to benefit from the increasingly resilient portfolio that we have established through our efforts to continue to transform the portfolio over the last four years.

With our consistent free cash flow, strong M&A pipeline and an expanding set of organic innovation capabilities, we are well-positioned to capitalize on the many opportunities ahead of us. With that, I would like to turn it over to Griffin..

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

[Operator Instructions]. Your first question is from Jeff Sprague with Vertical Research..

Thank you..

Good evening Jeff..

[indiscernible]..

Jeff, we having a tough time hearing you..

That any better?.

Yes..

Sorry about that.

Can you just help triangulate us on full year free cash flow for Fortive RemainCo? Kind of what our starting base is? And whether or not there's anything really unusual on working capital or other items that would kind of hinder our ability to grow off that base?.

Thanks Jeff. As you probably noted, it's another strong quarter in Q3 for both companies, I think for both Vontier and Fortive. The simple answer is no, I don't think there's anything that will hinder us going forward. It's been pretty strong. Year-to-date, I think the combined company's free cash flow, I know they are up about 48%.

But I think the split going forward, if you think of it, it's a bit of trailing year-to-date or trailing 12, it's about 60-40 split here and I think that's probably a good proxy going forward..

So roughly 60% of what we saw year-to-date, we can attribute to the RemainCo?.

Yes. Yes, is the answer I am trying to say. Obviously, there's some things that are improving throughout the year, but they will be offsetting some of the deal cost and headwinds associated with the separation cost. So that's a pretty good number to use..

And then just on the productivity and restructuring actions.

Are those actually restructuring charges per se? Or is this just kind of a more operational move against some costs to make permanent some of the actions you have taken earlier in the year?.

These will be called out as a separate restructuring when we report Q4..

And Jeff, I would think of those as really in two buckets. One would be the, I think what we have done is, we have done an incredible job this year on digital transformation, allowing us to do a number of things. So a part of that will be sort of leases and a reconfiguration of our sort of real estate footprint around the world.

And then the rest of it is sort of, what I would say, our cost actions that we are taking around the portfolio where we think things may not necessarily come back faster or in places where we want to make sure we are protecting investments for next year..

Great. Thanks. I will pass it on..

Thanks Jeff..

Thanks Jeff..

Your next question in queue is from Josh Pokrzywinski with Morgan Stanley..

Hi. Good evening guys..

Hi Josh..

So just a couple of questions. I guess first, just on the pace of near term activity. Obviously, buckets three and four are still under some pressure here. We have seen a lot of short-cycle industrial markets start to improve a decent amount sequentially. Obviously, some of that here as well.

But how important is just kind of flipping the calendar in terms of resetting budgets or thinking about inventory positions? Just trying to think about what gets these things kind of back on the map versus where we are today?.

Yes. Well, first I will maybe take one note that you made. I think we feel, from a standpoint of where we have channel inventory and that's probably in the three big places would be Fluke, Tektronix and to some extent, ASP. We feel good about channel inventories and where those are at.

So we don't think we necessarily will see any issues relative to inventory in the channel that could be a hindrance to growing through the remaining part of the year and into next year. So that's really a small part of it.

I think we are continuing to look at three things to really drive the business sequentially here through the year and certainly into next year, Josh. They really fall into this bucket.

Certainly, as you pointed out, short cycle, some improvements at PMI, some improvements in industrial production to see those continue and maybe to be a little bit more broad-based globally. Secondly, elective procedures. We have seen some nice improvement from Q2 to Q3.

When does that continue to improve? I think right now, we don't have a belief necessarily that those numbers that I quoted in the prepared remarks necessarily change too much in the short run. But we are certainly watching that, particularly around the world, to see how those go.

And then I would say the third thing is how much of return to work, what shutdowns occur, those kinds of things, that has some impact really on how we get on to customer sites to do things, whether it be on some of our software businesses where we are doing service businesses on-site. Some of that has been slowed.

Some of the customer decision-making has been slowed. So I think we are looking to some of those things to see if those start to improve. So I think those are the three big things we are probably continuing to keep an eye on. We think the business will continue to sequentially improve.

But I think the inflection point, the big inflection point really happened from Q2 to Q3..

Got it. That's helpful. And then just shifting more strategically now that the Vontier separations behind, you can start thinking about future M&A with a reloaded balance sheet. I guess just with the new segmentation. The segment that sticks out on a pro forma basis looks like Precision Technologies.

I mean I think in the other two, the whole workflow solutions portfolio pieces seems to come through in the various key parts, maybe not as much in that piece.

How should we think about that in terms of M&A priorities? Would it be to kind of shore up some more of that end-to-end solution in that piece of the business or to continue building on the other two where you already have some good momentum going?.

Yes. Well, obviously, we like the momentum we have created in the two, so every intention of maintaining that momentum, as you highlighted. I think as we think about Precision Technologies, we really certainly see Tektronix and what they do in a workflow around product development and innovation and we see a number of vectors and opportunities.

I think the team did a wonderful job this year in their strategic plan, really highlighting some of those opportunities. So we are certainly looking in that way.

And then we think about Sensing and we really have a broad view of really maybe not necessarily a huge workflow, but we can play differently in the workflow, whether it be with IoT-enabled sensors, whether it be maybe a little bit bigger part of the solution, like in Anderson-Negele where we now have a digital recorder that can really do more of the verification work.

So we are certainly seeing a slightly bigger solution that we can play in, in Sensing Tech and I think that's where the opportunities will be. And then obviously, I think Tek does play in a workflow that's pretty well-defined.

So I think we really believe that when we look out and you obviously heard the numbers in terms of total available market space, we really think there's a number of opportunities for us to continue to work on, quite frankly, the places where we are at today and just expand upon them, both inorganically but also organically..

Perfect. Thanks for the color..

Thanks Josh..

Your next question is from Scott Davis with Melius Research..

Good evening guys..

Good evening Scott..

Hi Scott..

You seem to have snapped back pretty quickly. It's nice to see. Good work there. But I don't know if you want to take a stab at this, Jim.

But do you think Fluke Industrial has a chance of actually crossing into the positive territory in 4Q?.

Well, there is a little bit of way to get there. But certainly, we like the trends. We announced a few product launches that are going to be part of Q4. We now have a thermometer that has a clinical nature to it, which we have got EAU on, so I think that. We have got a new imager out.

So I think that when we look at Fluke Industrial, we had a great quarter in China, as an example, where I would say the market is pretty good and we have just done a better job of taking advantage of that market. I would like to see the markets continue to improve in places like the U.S. I think Fluke Industrial has a good shot in the U.S.

Europe may be a little bit more mixed. And high-growth markets may be a little bit more mixed. So I think overall, Fluke Industrial is going to continue to improve. I think the U.S. will look good, Scott.

I think maybe some of the other markets around the world, non-China, I think there's still some questions about what the macro is going to look like in some of those parts of the world between now and the end of the year..

That makes sense. And another one on the topic of China.

Do you have a sense, Jim, whether the recovery there is still accelerating? Or did we snap back and now we are at kind of a plateau and so the rest of the world really has to contribute for us to take another step-up?.

Yes. We had a really. new Fortive had a very good quarter. As we said, double digit growth in ASP and Sensing was almost 20%, I think, Fluke, obviously, double digits. So that's pretty broad-based from healthcare to industrial to OEM. I suspect, Scott, that a little bit of that was a snapback from maybe what happened in the first part of the year.

But we still see growth there. And I think the world, whether the next level of growth come, they are obviously stimulating that economy. I think what we are continuing to watch is, obviously, if other part of the world stimulates their economies, that maybe provides some impetus to catch up.

But I think China probably still leads the pack here through the remaining part of the year..

Okay. Really helpful. Thanks. Good luck guys..

Yes. Thanks Scott..

Your next question is from Julian Mitchell with Barclays..

Hi. Good evening..

Good evening Julian..

Maybe a first question on the margin outlook. So your guide on slide 14 for that 35% incremental. Just wondered if that's a good placeholder looking out beyond the fourth quarter? You are doing some cost-out measures in Q4.

I wondered if you could frame how large the opportunity is for cost reduction with a sort of simpler portfolio without Vontier today? And any major puts and takes on temporary cost reversals or big fixed cost-out next year..

So Julian, I think we would think of it this way. First of all, we are a long way from guiding the topline, which is the biggest number here in Q2. What we are trying to signal is, the 35% incremental margins is how we are going to run the business.

Of course, assuming we move into positive territory next year, that will come back at better than 35% margins. But we have got some headwinds of the temporary cost that will snap back in as well.

And these productivity initiatives that we have put in place, we think, gives us the latitude under a number of scenarios to manage to the 35% incremental margins. The last piece of the equation will be, depending on what the topline does, we will be pacing our reinvestment back into the business.

But we like the 35% because it lets you know this is what we are trying to manage the business to..

Thanks. And then maybe a follow-up just on the M&A appetite today. I think you called out that $2.8 billion as sort of real-time leverage. So maybe help us understand how quickly you want to get to work on acquisitions? And just clarify the extent to which that's contingent on monetizing the 20% Vontier stake..

Yes. Julian, it's Jim. I think really, we have tried to not really ever slow down our effort. I think we have tried to remain disciplined. We said at the beginning of the year that we would probably be mostly a bolt-on kind of, just pre-COVID, be a bolt-on kind of year. We obviously announced anything but I think we have been busy through the year.

We have looked at a number of things. I think we have remained disciplined in that regard. I think our appetite to continue to accelerate the businesses through M&A is always something we are trying to do. I think we are very comfortable with the funnels that we have created.

I think the new segment structure will really helps us understand and articulate really a vision for each one of those segments that I think is exciting for companies that are interested in maybe selling themselves. So I think we are in a very good place relative to where we are at strategically from an M&A execution standpoint in terms of readiness.

And obviously, the balance sheet is in much better shape in order to give us these opportunities. And we will be in continued good shape given where we are at, as we mentioned in the prepared remarks, not only with the continued free cash flow but obviously with the opportunity with the Vontier stake as well.

So I think we are in a very good position right now for M&A as we look into the fourth quarter and into 2021..

Great. Thank you..

Your next question is from Steve Tusa with JPMorgan..

Hi Steve..

Hi guys.

How's it going?.

Good..

Just on your software businesses, do you have a kind of a look into, A, kind of how big just those standalone software businesses are now? And then could you give us an idea of what bookings as well as retention rate is and how those were kind of trending? Those two things?.

So software revenue now is about low teens. So think of it that way in a number. And I don't know, it's going to vary a little bit quarter-to-quarter. But low teens is probably the right number. I don't have the bookings number in front of me, Steve. But if we think about SaaS bookings, they were pretty good in the quarter.

I would say probably in the range of mid single digits probably. And net retention was over 100%. We had our best net retention number of the year and so through the quarter. So we feel good about net retention. It's a little harder today, if you think about the components of net retention.

Things like upselling and cross-selling, take a little longer in this environment, in a COVID environment. So renewals take a little bit longer. So we are seeing some of these things move out in the funnel. So some bookings will move around a little bit more. The funnel is taking longer to close.

But I think that's why we keep such a good eye on that net retention number because it's so important to us.

So having a number that's the best of the year and better from a year ago and certainly better than a year ago is just, I think, a testament to how we have used the Fortive Business System around the various components of software business to continue to make sure that we are driving the business even in a really, obviously, in a challenging environment..

And then what was total revenue growth for that bucket of revenue?.

I think we were roughly, for all the software businesses, all up, we were roughly flattish. And the SaaS businesses, we are mid single digit..

Okay. That's fair..

So what happens is, the SaaS parts are mid single digits. What's the more challenging part is the on-site services, professional services. That's the part of the business right now that's lagging. And that's just a situation of, it's just harder to get on-site to do some of it.

We are significantly better than we were in Q2 because of a number of the remote site work that we have developed in order to be able to do remote turn on. But we need to continue to do that. And then it's just taking longer with some customers..

And what's the split of that revenue between like, what you would consider to be kind of recurring and the more transactional?.

Steve, I think it's two-thirds, one-third roughly..

Two-thirds SaaS. Right..

Right.

So the two-thirds up kind of low to mid singles and then the stuff that's not recurring down, given the environment?.

Yes. I mean, in some of the businesses, obviously, we vary from business-to-business. As we called out in the prepared remarks, we have got some businesses that are able to kind of push through that because their amount of on-site support is less. So we turn on faster, that kind of thing.

Accruent is a business where we have a little bit more service than professional services and managed services than we do and maybe some of the other software businesses, as an example..

Got it. And one last one.

On those kind of on the more transactional stuff, what is the impact on margin? Is the recurring stuff higher margin? Or is the episodic stuff higher margin? I am trying to kind of read through some of these software reports?.

Yes. Almost without exception, the SaaS businesses are higher margin..

Okay. Great. Thank you..

Thank you Steve..

Your next question is from Andrew Obin with Bank of America..

Hi. Yes. Good afternoon..

Good evening Andrew..

Okay. Just a question, it's a COVID question. And just thinking about, A, your commentary about elective surgery and also sort of getting site access in software.

How are you seeing sort of these businesses developing given that we sort of have more news flow about rising COVID cases into the fourth quarter? What kind of visibility do you have? And maybe you can give us some color on the trends in October for both? Thank you..

Yes. So on elective surgeries, the numbers we highlighted in the prepared remarks are about what we saw in October. So I don't think much difference. And quite frankly, we are not planning for those numbers to improve. So we don't need necessarily an improvement in things.

And I do think relative to hospitals, as we have talked to large major hospital chains, particularly in the U.S. customers, I think they are much better prepared now for COVID in order to maintain procedures, whereas at the beginning of all this, they obviously weren't as prepared.

So I think the hospital network today is much more prepared to continue to do elective procedures with the increase in COVID cases than they were in the second quarter. So we feel pretty good about the number we have. Obviously, it's impossible to predict the pandemic and that kind of thing. We are not going to get into that position.

But I think we feel like we understand that. And we certainly have other scenarios. But I think our scenario that we have going forward is for that not to necessarily improve the remaining part of the year. Relative to getting on-site for customers, I think we are in a mode of not expecting any more on-sites.

Really, what we are trying to deal with is really, we have assumed for pretty much since the middle of the summer that our customer set was just going to continue to take longer. So our offerings had to be more digital-oriented. We had to move our services organization to try to do more remote on-site support and we continue to do that.

We have no expectation necessarily of needing people to get back to work anytime soon in order to sort of fulfill where we think things are at. And that's maybe the uncertainty that continues to remain. But we would love to see people getting back into some things that are normal. But we don't suspect that as between now and the end of the year..

Well, it's good to hear and it's not good to hear. But it's good to hear in regards to your guidance. And just a follow-up question on Tektronix. Could you give some color by vertical in Tektronix, federal, semis? What are you guys seeing there? Thank you..

Yes. In the quarter, we had good auto. We had good semi. We had good Mil/Gov. I think Mil/Govs continued to be pretty good. And we saw what we would call consumer electronics was pretty good as well. So those sectors were pretty good. I would say sort of general industrial and it was probably the place where we saw maybe things not as good.

But certainly, really, semiconductor was really driven at Keithley. The Keithley comment we made in the prepared remarks was really driven by semi. So I would say auto, semiconductor and Mil/Gov were the three segments that we saw positive growth in the quarter..

Good to hear. Thank you so much..

Thanks..

Your next question is from Andy Kaplowitz with Citigroup..

Hi. Good afternoon guys..

Hi Andy..

Hi Andy..

Jim, how much of the slowdown that you saw at Gordian, do you think, is the temporary access issues that you talked about versus the pressure that you cited from state and local governments? And would you expect to see Group I that you talked about stay around that low single digit growth moving forward at least for the next few quarters?.

Yes. There's a couple of drivers that would have helped Group I. One is, as we noted, our EMC business, which has just a tremendous backlog and has done a great job of securing new business, has really had some supply chain challenges driven by COVID.

And some customer acceptance issues they have in terms of having customers come on-site to approve things has been a challenge. So I think if they had had even normal quarter, if you will, it probably would have boosted that group a couple of percentage points, probably, a couple of basis points.

Relative to Gordian, I think we continue to think that it's probably a two-third, one-third issue relative to two-thirds on-site challenged, one-third state and local government, education budget kind of situation. I think obviously, those budgets are challenged.

But in many cases, as you know, Andy, we don't play in the new construction aspects or the new building kind of part of this. This is really the renovation and operations part of facilities management. So we feel that that's going to continue as we start to get some, facilities still need to get some of these things done.

So there will be some pressure in that for sure. So we are not suggesting that that's perfect. But we really do start our job order contracting business but generally with an on-site assessment. So I think that's a couple of quarters probably of challenges we continue to see where the pandemic goes.

We were really pleased with our RSMeans Online business, which was up, I think, high single digits in the quarter. So, part of the business continues to do well from a customer engagement perspective, but the job order contracting business is the biggest piece. We think it's got some pressure for our outlook for at least a quarter or two here..

That's helpful Jim. And then you mentioned to Josh about sort of Sensing Tech opportunities. One of the big topics that I always get asked about is sort of digital transformation and what it can mean for companies.

Are you seeing evidence because of COVID itself for the need for more sort of automation software in general and more conversations around some of your products that could drive growth as you go into 2021 and beyond?.

Yes. I think a lot of what we have done in Sensing Tech around digital transformation has actually been on the innovation side. They have been one of the great users, if you will, or participants in a number of our growth accelerator innovation projects. I mentioned Anderson-Negele has a digital process recorder.

That is all about workflow validation and then playing a bigger role in the digital world for their customers. And so that's a good example. Setra had a play with COVID of their airborne in negative pressure situations. They have an infection monitor, if you will or air monitor that they have been able to put into workflow, all around COVID.

But it’s also digitally helps these isolation rooms understand where they are at. So I think our sensor businesses, through the efforts they have had over a couple of years of broadening the work they want to do, not just be a sensor, but a little bit more of a solution, that's the work we have done for a couple of years.

And I would say that that's starting to accelerate. Still small numbers though. I think if we were to look at what those numbers look like, I think it's probably, we would start to see the benefit of that with some scale, probably not until 2022.

But we like the trajectory that those teams have really been and the traction those teams have really been getting in the last 12 months..

Appreciate it, Jim..

Thanks Andy..

Your next question is from Richard Eastman with Baird..

Yes. Good afternoon. Thanks for the question.

Jim, could you just speak to ASP for a minute? And when you look at that business and how it performed in the quarter, down mid single digits, what was the composition of that? Was it replacements machine or equipment replacements down big and consumables starting to ramp back up? And when does this patient procedure number start to factor into their business? Can they have an up fourth quarter at ASP?.

Yes. So there's definitely a story around the world. I think when we look at, as I said, none of the major regions, China, Western Europe or the U.S., had elective procedures back to 100%. And yet we had strong growth in China and Western Europe. Western Europe has had a good capital opportunity.

So they have sort of seen more capital placements during a time when maybe consumables were actually not growing as much, but capital has made up for it. China, a little bit of the same story. We haven't seen as much of that in the U.S. And so, we see naturally that the U.S. is a little bit maybe farther behind in that regard. But I think we feel good.

We had a good full year. Our biological indicator business was very good around the world. That's a part of the business that's fairly sizable. Obviously, terminal sterilization is the biggest piece. And it's really, at this point, I think, going to be more North American return. We think we can continue, we have seen some nice placements here recently.

But they have a bigger part of their business is services and consumables. So I think we still need to see that sort of come back. I am not necessarily predicting that this year. But I think in 2021, we will start to see some of that improvements and some of the impact of some of those things, the placements that we have seen here recently.

So we feel good about the business. We have done a number of things to get the business on track, as you well know. And I think it's on a good trajectory at this point..

And you referenced to ASP when you spoke to the channel around Fluke and Tektronix.

Is the channel and any inventory that might be in the channel, is that around consumables? Or is that around the equipment?.

It's around consumables. And it's not a big number like Fluke and Tek. Fluke and Tek, as we know, is 40%, 50%, 60% of revenue is in distribution. It's not that number. But there are some aspect of channel inventory. That's why I referenced it..

And just maybe bigger picture, as well.

When you think about the equipment and instrument placements versus maybe the 30% of NewCo Fortive that's recurring or services, how did the overall instrument placement or equipment placements look in the third quarter relative to that consumable number or recurring number?.

Yes. So one is, I think new Fortive is going to be approaching almost 40% in total recurring revenues. So just so you have that number, it's just shy of 40% at this point. So I think every quarter moves a little bit. I don't have the numbers handy.

But I would say in general, we tend to think of the recurring revenue part of that business is about 80% of total versus capital. And within that 80% is consumables. Probably, two-thirds of the 80% and services is maybe a third..

Okay..

And that number doesn't change radically quarter-to-quarter. So if it does, it really is sort of one particular customer. And I think it's always better to sort of think about that on a year-to-date basis, anyway..

Okay.

And just if I could sneak one more in, are you going to lay the SVP structure on top of the new segmentation? Is that the plan to manage?.

Yes. We would. Yes. So we are obviously going to continue to rollout some color around the organization. But you could think of that as an organizational view as well. So, as you think about that structure, you can think about it as an organizational view as well..

Okay. Very good. Thank you. Thanks again..

Thanks Rick..

Your next question is from John Walsh with Credit Suisse..

Hi John..

Hi there. Good afternoon. I wanted to revisit incrementals on the fourth quarter and just come at the question a little bit differently. I think you guys have out-kicked what you were guiding this year there in terms of incrementals.

But is there anything from a mix perspective or a need to reinvest in any of the product lines? Just because 35% would be a step down from where you have been in the last two quarters. Just trying to understand if there's a specific item or we are just a little bit conservative on topline trajectory..

We had uncertainty, I would say, coming into the third quarter where the topline would end up and it did come in better than what we built the cost structure around. And that's what you are seeing about why the incrementals are a little bit better. I think we are talking relatively smaller dollars compared to Q2, of course, in terms of the magnitude.

But in Q4, some of those expenses will come back into our expense base as the topline recovers. But we are also trying to balance what we are seeing to deliver that 35% margin and continuing to invest as much as possible to spur growth and future success for our customers and our businesses..

Got you. No, that makes sense. And then I guess just a mechanical question here around the remaining monetization of Vontier.

As you monetize that, will there be any kind of announcements triggered as you monetize that position? And then maybe, how do we think about kind of the tax implications as you do that? I am not sure kind of, if you have a dollar cost basis in the stock when it's split off or if there's anything we need to think about as you monetize the remaining 20%..

Well, with the remaining 20%, as it sets up right now, assuming we do it in the next 12 months in our base case or sooner, we don't really have any tax implications there. It's set up as a tax-free spin or tax-free transaction. I think that the timing is, what we needed to do is, we need to spin the company.

We need to have these earning calls, file these Qs. We want to get to the other side of the election and then we are going to let market dynamics dictate what the right timing is. And we will be upfront about that. But we need to probably get another month, probably get well past the election, I would guess, at least.

But I would like to get it, hope to get it done in the first half of next year or sooner..

Okay. Thank you. Take care..

Thanks John..

Your next question is from Deane Dray with RBC Capital Markets..

Thank you. Good evening everyone..

Good evening Deane..

I was hoping you could clarify where you stand on addressing stranded costs at RemainCo. I might have missed this. But it did sound like some of that $30 million repositioning had some footprint reductions which sound like taking out stranded costs. But if you could just start with that, please..

Yes. Deane, I wouldn't say that they are really addressing stranded cost per se. I think it's more, Jim talked about the digital transformation and the opportunities we are seeing for streamlining some of our operations and also setting us up for next year. We do have a smaller revenue at this point in time.

But it's not related to empty buildings due to the split. It's more on, there are some leases and buildings that we are exiting there for sure. But it has more to do with how we see a different way to run these businesses given what we are calling the digital transformation..

Got it.

And are there any shared services with Vontier that will be in existence? And if so, for how long?.

There very few. Most of them completed before the end of this year. There's a few, as there were when we separated from Danaher, most notably around the tax agreements where we have to file taxes from this, just can't get away from that until for a long period of time. But I would say, minimal beyond the next two months.

I think Dave and Mark has done a tremendous job building their organization..

Excellent. Just last one.

Just when you were rattling off some of the quarter dynamics, did I hear PacSci EMC, there were some supplier issues? Was that company-specific? Or was there any systemic issue, a product shortage or anything like that?.

Yes. No, I think we have dealt, we had some supply chain issues. I think that a lot of people talked about in Q2, Deane. We have mitigated and really did a great job. The supply chain team is really proud of the work they did in the quarter. Particularly, as you know, we continue to guide revenue up through the quarter.

So we continue to see revenue coming in higher as we move through the quarter. And yet our on-time delivery metrics were good, our past due backlog.

So it's really an issue that's very specific to really a couple of suppliers who had challenges in their own factories with COVID and with, as I said, the customer on-site work, which is just tougher to communicate and sort of coordinate, if you will, with a bunch of customers in a business where you need on-site approval before you ship to a customer..

Got it. Much appreciated. Thank you..

Thanks Deane. Have a great night..

You too..

Your next question is from John Inch with Gordon Haskett..

Yes. Thanks very much. Hi everyone..

Hi John..

So a quick question on tax. Hi guys. You have one of the lowest tax rates amongst multi-companies. And I believe when you bought ASP, you did some tax structure reorganization favorably for the shareholder benefit. I am wondering if you guys have any preliminary thoughts on the proposed Democrat tax plans.

I think they obviously clearly want to raise corporate taxes for everybody. But I think they have talked about going after GILTI taxes and other aspects of this as well. I am just curious if there are other levers, prospectively, that you could pull to kind of keep things as favorable as they have been in the past..

Thanks John. Well, I think we are watching a number of things. And there are different scenarios and things that we can do that are potential countermeasures. But before we start thinking about, will they be able to offset any taxes that may or may not happen, we need to see exactly what they are going to change and what the timing is.

And then remember, overlay it with what's happening in the rest of the world. We have got not quite half of our income and revenue outside there. And they are changing their taxes too. So we have to see how all that plays. It will be well into next year before we will really be able to have an opinion there about what it will actually do..

Okay. No, that's fair. Thanks Chuck. And then just as a quick follow-up.

I found it actually interesting, it's not even ironic, that healthcare now has become a reporting segment or platform, which clearly wasn't the plan envisioned when Industrial Fortive was spun out of, call it, healthcare Danaher, right? And so my question is, do you see healthcare opportunities, Jim, in today's market with valuations pretty high? Do you see these opportunities being able to sort of expand this platform to become even something that's much bigger than perhaps we even envision today?.

Yes. And I guess also part of your question is, boy, you got ASP at quite the value. But I think at the end of the day, we have now built a $1 billion platform in healthcare. And as you said, I think we have a very good position. Our position is really and the workflow we are really talking about is really, in many respects, hospital enablement.

It's about helping hospitals be more innovative, help them drive efficiencies, deal with patient safety. And I think there's a number of opportunities. We have got a wonderful amount of work that we have done around that workflow. We think the current businesses we have today have opportunities. And we do think we have a number of opportunities.

I think we bought Censis last year. It's our most recent acquisition, which has been a very good deal for us. And again, I think we would continue to see, add a good value. So I think we have been able to find opportunities. And it's really about what we can do with them now.

And I think now with a scalable $1 billion platform, two years ago, three years ago, four years ago, we didn't have necessarily that platform on which to build on, which you can generally get faster returns in some cases because you are buying, you now have bolt-on opportunities, right? And so the mix of capital allocation can be a mix of maybe longer term returns and some value creation opportunities.

And I think now more than ever, we have that opportunity, John. So I think we are really excited about the work that we have done there. And we are excited that we are pushing through and got ASP into the family in the timeframe we said it would be a lot of work to get there. But I think now we have a launch pad on which to build off of..

Yes. And to your point, Jim, hospitals clearly need the help, right? So, thanks again. I appreciate it..

Yes. That challenge isn't going away..

Your next question is from Joe Giordano with Cowen..

Hi guys. Thanks for squeezing me in..

Thanks Joe. Sure Joe..

Just on the healthcare side, again. Jim, I appreciate the comments earlier that hospitals are better prepared now to deal with rising cases than last time.

Like how far are we in terms of patient load now versus where we were when things started to shut down? And how far, like above that level, do you think it can get before that becomes an issue? And how are you guys thinking about European business now with France talking about 30-day lockdowns and things like that?.

Yes. So I think first, I am not sure we would necessarily, in North America, I think in Q2, we were in the 75%-ish load at its low point. That's probably a good number to sort of work from. And I think where we are at today, you never know. So there's certainly ambiguity in every one of these comments.

But I think we believe that just because of our own on-site work in the last few months that the hospitals are much better prepared for what could potentially happen with caseloads going up. And obviously, the financial situation in which elective procedures are a tremendous funding mechanism for hospitals.

There's a financial ramification to getting rid of elective procedures. So I think we feel that the numbers we quoted a few times on the call today, that sort of 90%-ish range in the U.S., I think that's where we think the rest of the remaining part of the year will be. And then let's see what the trend line looks like for 2021.

I wouldn't begin to start to predict what those numbers would look like for next year. Western Europe, let's see. One country is not going to make a huge difference. We would need to see that pretty broad-based. Let's see where that goes. And again, I think sterilizations continue. The good thing about this is that there are a lot of elective procedures.

There's still a lot of procedures that go on that are not elective as part of the business. So surgeries still happen. A lot of procedures have to happen because they are emergency-related. So as I said, I think let's see where that goes. For sure, we are prepared for a variety of scenarios..

Thanks guys..

I think we are going to have to call it there. I apologize if we didn't get to you. Certainly, Griffin and Ross are available for follow-up conversations if we didn't get you or for anything that is needed. We obviously want to thank everyone. I want to thank everyone, it's hard to believe that 2020 is three quarters or really 10 months now finished.

It's been a tough year for everyone. I know I am including everyone on this call. We appreciate all the support. We are incredibly excited about where we are at. We are excited for everything that we have going, the new segmentation. Hopefully, you see the excitement that we have in our voices as we move forward with new Fortive.

And we know the Vontier team is going to do an outstanding job. They will be on the phone on Thursday. And I know they are going to do a great job. Best of luck to them as well to our friends over there. Mark and Dave are going to be great. Thanks everybody. Have a great evening. We will talk to you soon..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..