Executive Summary / Key Takeaways

• Fortive Corporation has successfully transformed into a simpler, more focused entity following the spin-off of its Precision Technologies segment (Ralliant Corporation) in June 2025, positioning itself for accelerated and durable financial performance.
• The company's core investment thesis is underpinned by its "Fortive Accelerated strategy," which leverages the Fortive Business System (FBS) to drive profitable organic growth through innovation, commercial acceleration, and recurring customer value, complemented by disciplined capital allocation.
• Fortive's Q3 2025 results demonstrated strong operational execution, with core revenue growth of approximately 2%, adjusted EBITDA growth of 10%, and adjusted EPS growth of 15%, exceeding expectations despite dynamic market conditions and tariff headwinds.
• Technological differentiation, particularly in AI-powered software solutions for industrial and healthcare workflows, and precision instrumentation for high-growth verticals like data centers and solar operations, forms a critical competitive moat, driving recurring revenue and enhancing customer productivity.
• Management has raised its full-year adjusted EPS guidance to $2.63-$2.67 per share, reflecting Q3 outperformance and strategic share repurchases, while maintaining a prudent outlook for Q4 amidst ongoing market uncertainties and tariff mitigation efforts.

A Focused Future: Fortive's Strategic Evolution and Market Position

Fortive Corporation, incorporated in 2015, has consistently leveraged its proprietary Fortive Business System (FBS) to drive growth, innovation, and profitability within the industrial technology sector. This foundational commitment to operational excellence has enabled the company to achieve a 4% compounded annual core revenue growth over the five years leading up to 2025, demonstrating resilience even through periods of global economic uncertainty. The company's strategic evolution culminated in a pivotal moment on June 28, 2025, with the spin-off of its Precision Technologies segment into an independent entity, Ralliant Corporation. This strategic divestiture was designed to create a "simpler, more focused" Fortive, sharpening its emphasis on its Intelligent Operating Solutions (IOS) and Advanced Healthcare Solutions (AHS) segments.

In the broader industrial technology landscape, Fortive operates in highly competitive environments, facing diversified industrial conglomerates like Honeywell International (HON) and Emerson Electric (EMR), as well as specialized players like Danaher Corporation (DHR) in healthcare and Rockwell Automation (ROK) in industrial automation. Fortive's market standing is competitive, though not dominant, distinguished by its specialized focus and strong brand portfolio. For instance, in industrial automation and test instruments, Fortive's ruggedized professional tools and calibration solutions, particularly under the Fluke brand, emphasize reliability and ease of use, potentially offering greater efficiency in field applications compared to Honeywell's broader systems. Similarly, in areas like electrical test instruments, FTV's Tektronix brand (now part of Ralliant) offered notably higher precision in measurement applications compared to Emerson's offerings, providing an an edge in performance-sensitive sectors. In biomedical test tools, Fortive's Fluke Biomedical brand provides materially better integration with healthcare workflows than Danaher's broader diagnostic tools, positioning Fortive as more specialized. Against Rockwell Automation, Fortive's asset lifecycle software solutions may offer significantly greater flexibility for end-users compared to Rockwell's more standardized platforms, providing a key differentiator in customization.

Fortive's competitive advantages, or moats, are primarily built on its strong brand portfolio (e.g., Fluke, ASP, Provation) and proprietary technologies in precision instrumentation and software. These brands foster deep customer loyalty, translating into recurring revenue from services and strong pricing power. For example, its specialized tools offer significantly higher accuracy in demanding environments, helping Fortive differentiate against competitors whose broader systems might lack this precision. However, Fortive faces vulnerabilities such as potential supply chain dependencies and a more focused market presence compared to larger, more diversified rivals. These factors could lead to higher costs during disruptions or limit market share capture in high-volume, generalized industrial markets. Barriers to entry in Fortive's industries, such as high R&D requirements and stringent regulatory compliance, help defend its market position by limiting new entrants and sustaining market share.

Technological Edge: Powering Productivity and Safety

Fortive's core differentiated technology lies in its blend of advanced instrumentation, specialized software, and AI-powered analytics, all designed to enhance precision, productivity, and safety across critical industrial and healthcare workflows. This technological prowess is a cornerstone of its competitive moat and directly underpins its financial performance and market positioning.

In the Intelligent Operating Solutions (IOS) segment, Fluke's professional instrumentation, such as the GFL 1500 solar ground fault locator, exemplifies this. This tool marks a significant foray into the high-growth solar operations vertical, increasing customer productivity by reducing troubleshooting time and decreasing hazard exposures. Fluke's 1670 Series Multifunction Installation Tester with TruTest software and Fluke Connect wireless connectivity was recognized as the "most valuable product" in Control Engineering's 2025 Product of the Year Awards, highlighting its market-leading innovation. Furthermore, Fluke Reliability, through brands like eMaint and Pruftechnik, offers advanced solutions for industrial asset performance. eMaint, recognized as a leader in both Computerized Maintenance Management Systems (CMMS) and Enterprise Asset Management (EAM), provides a flexible asset hierarchy, robust data integrity controls for multi-site operations, and advanced asset tracking via interactive image mapping, spatial coordinate tagging, and IoT integration (Connect2Assets). These features enable customers like SKF (SKFRY) to standardize maintenance operations across 81 sites and 76,000 assets worldwide, driving better maintenance decisions, improving productivity, boosting uptime, and reducing costs. The newly launched Shaft Alignment solution, featuring rugged professional tablets compatible with Pruftechnik’s single-laser alignment tools, directly addresses the issue of misalignments, which are a leading cause of 50% of unplanned downtime in rotating machines. Precision alignment programs offer the potential to save thousands in utility costs and extend machine lifetime.

The company's R&D initiatives are heavily focused on integrating AI and IoT capabilities. ServiceChannel's SaaS, for instance, has introduced AI-powered work order insights and streamlined payment solutions, enhancing efficiency for facility maintenance. Fluke software is increasingly viewed by customers as a crucial tool for scaling the impact of AI, leading to strong IT spending in this area. Fortive has integrated an AI center of excellence directly into its FBS team and expects to launch new AI-based product sets in 2025 and 2026. This focus on AI extends to the Advanced Healthcare Solutions (AHS) segment, where Provation launched AI assistants and intelligent automation to drive productivity in key healthcare workflows.

These technological differentiators translate into tangible benefits for investors. By offering solutions that reduce downtime, improve efficiency, and enhance safety, Fortive commands strong pricing power and fosters recurring revenue streams. The expansion of recurring revenue, particularly at Fluke through maintenance software enhancements and service plan offerings, is a key strategic pillar. This focus on high-value, often mission-critical, solutions strengthens Fortive's competitive moat, supports higher average selling prices (ASPs), and contributes to superior gross and operating margins, driving long-term growth and market positioning in specialized, high-growth verticals like solar operations, distributed energy, data centers, and defense.

Financial Performance and Operational Discipline

Fortive's financial performance in Q3 2025 showcased the benefits of its sharpened focus post-spin-off. The company delivered total revenue of $1.027 billion, marking a 2.30% increase year-over-year on a GAAP basis and approximately 2% on a core basis. This performance exceeded management's expectations, driven by solid execution across both segments. Adjusted EBITDA grew by an impressive 10% year-over-year to $309 million, with the adjusted EBITDA margin expanding by approximately 200 basis points to 30%. This margin expansion was a direct result of operating leverage, deliberate organizational streamlining, and a heightened focus on corporate cost discipline. Adjusted EPS reached $0.68, a 15% increase year-over-year, benefiting from EBITDA growth, lower interest expense due to reduced debt, and the positive impact of share repurchases.

The Intelligent Operating Solutions (IOS) segment reported sales of $698.80 million in Q3 2025, with core revenue growth of 2.20%. This growth was fueled by strong demand for facility and asset lifecycle software, resilient demand for professional instrumentation despite tariff volatility, and robust growth in gas detection products. IOS adjusted gross margin, however, declined by just over 90 basis points to 65.7% due to tariff cost pressures, partially mitigated by pricing actions and supply chain countermeasures. Despite this, IOS adjusted EBITDA grew 7% to $242 million, with margins expanding to 34.6%, reflecting operating leverage and organizational efficiencies.

The Advanced Healthcare Solutions (AHS) segment generated $328.30 million in sales, achieving core revenue growth of 1.10% in Q3 2025. While healthcare customers remained cautious due to policy changes, the segment saw sequential improvement in demand for healthcare equipment and consumables, alongside continued strength in its resilient SaaS-based software products. AHS adjusted EBITDA grew approximately 7% year-over-year, and its margin expanded from roughly 27% to 28%, driven by operating leverage and flattened organizational structures, even with modest incremental R&D investments.

Fortive's liquidity remains robust. As of September 26, 2025, the company held approximately $431 million in cash and equivalents. The $1.15 billion dividend received from the Ralliant spin-off was strategically deployed, with approximately $725 million used to pay down debt, including the entirety of its Japanese yen and euro-denominated term debt, and a portion of its 2026 euro bonds. This action reduced the gross leverage ratio to roughly 2.5x adjusted EBITDA, aligning with the company's target. The remaining dividend proceeds are earmarked for further share repurchases.

Fortive generated $266 million of free cash flow in Q3 2025, with a trailing twelve-month free cash flow of $922 million, maintaining a conversion rate comfortably north of 100% on adjusted net income.

Outlook and Strategic Initiatives

Fortive has raised its full-year adjusted EPS guidance to a range of $2.63 to $2.67 per share, reflecting the strong Q3 performance, the impact of incremental share buybacks, and an otherwise unchanged view for Q4. This outlook assumes a continuation of current market dynamics, with no material improvement or deterioration. Management anticipates overall core growth to moderate in Q4, with AHS core growth broadly in line with Q3 levels and very modest core growth at IOS. The full-year adjusted effective tax rate is expected to be in the mid-teens, with a Q4 tax rate in the single digits due to discrete tax items. A sequential increase in net interest expense is also projected for Q4, reflecting cash and debt levels.

The "Fortive Accelerated strategy" is now in full execution mode, focusing on three core levers for profitable organic growth: innovation acceleration, commercial acceleration, and recurring customer value. This is powered by an amplified Fortive Business System (FBS) and a disciplined capital allocation approach. The company is actively fostering customer-centric innovation, as evidenced by new product launches like ServiceChannel's AI-powered work order insights and Fluke's GFL 1500 solar ground fault locator. Commercial acceleration initiatives are targeting high-growth verticals such as solar operations, distributed energy, data centers, and defense in North America, and expanding presence in rapidly growing regions like South Asia. The drive for recurring customer value is seen in Fluke's efforts to increase recurring revenue through maintenance software enhancements and service plan offerings.

Capital allocation priorities for the new Fortive include investing in organic growth, pursuing accretive bolt-on M&A, returning capital through share repurchases, and maintaining a modest growing dividend. The $1 billion deployed to share repurchases in Q3 2025, retiring approximately 21 million shares, underscores management's confidence in the company's value and its commitment to maximizing shareholder returns. The M&A funnel has been revamped to focus on smaller, accretive bolt-on acquisitions that meet stringent strategic and financial criteria, without relying on M&A for the company's three-year shareholder value creation plan.

Risks and Challenges

Despite a strong Q3, Fortive faces several risks. Ongoing geopolitical events, global economic and consumer sentiments, and monetary policies continue to create uncertainty. Inflationary pressures on expenses and pricing, coupled with uncertainties in governmental policies on international trade, regulations, sanctions, and healthcare, could impact financial results. Specifically, the volatility in global trade policy, including tariffs, remains a source of uncertainty, potentially leading to near-term revenue impacts and challenges with revenue visibility. While Fortive has a proven playbook for tariff mitigation, including strategic pricing and supply chain adjustments, these countermeasures are expected to fully phase in by Q4 2025, with a modest gross margin and EPS headwind anticipated in Q3.

Healthcare customers continue to exhibit caution as they navigate changes to reimbursement and funding policies, which has led to deferred capital expenditures on healthcare equipment. Although sequential improvements in demand have been observed, the exact timing of a full recovery remains uncertain. Furthermore, constrained U.S. government spending and fiscal tightening at state and local levels have pressured procurement revenue in some areas, such as Gordian. While direct exposure to the federal government is relatively small, prolonged government shutdowns or fiscal policy shifts could have broader economic ripple effects.

Conclusion

Fortive Corporation's strategic transformation, marked by the successful spin-off of Ralliant, has positioned it as a more focused and agile entity. The company's Q3 2025 performance, exceeding expectations across key financial metrics, underscores the effectiveness of its Fortive Business System and the "Fortive Accelerated strategy." By prioritizing innovation, commercial expansion in high-growth verticals, and increasing recurring customer value, Fortive is building upon its robust portfolio of iconic brands and differentiated technologies. The disciplined capital allocation approach, evidenced by significant share repurchases, further reinforces management's commitment to maximizing shareholder returns.

While macroeconomic uncertainties, tariff volatility, and evolving healthcare policies present ongoing challenges, Fortive's proactive mitigation strategies and strong operational execution provide a resilient foundation. The company's technological leadership, particularly in AI-powered software and precision instrumentation, creates a durable competitive moat, driving productivity and safety for its diverse customer base. With a clear strategic roadmap, a strong balance sheet, and a management team energized by the opportunities ahead, Fortive is well-positioned to deliver on its medium-to-long-term financial framework, offering a compelling investment thesis for discerning investors seeking precision, productivity, and profitability in the industrial technology sector.