Executive Summary / Key Takeaways

• Fortive's strategic transformation, highlighted by the recent Ralliant spin-off, has forged a more focused, high-margin enterprise centered on essential connected workflow solutions.
• The company's Fortive Business System (FBS) and relentless innovation in areas like AI-powered software and precision instrumentation are key drivers of its competitive advantage and profitable growth.
• Despite recent macroeconomic headwinds, including tariff uncertainties and government spending pressures, Fortive's operational resilience has enabled solid earnings and free cash flow performance.
• With approximately 50% recurring revenue post-spin and a disciplined capital allocation strategy, Fortive is well-positioned for durable growth and enhanced shareholder returns.
• Investors should closely monitor the company's ability to convert its strong innovation pipeline into sustained market share gains and margin expansion within its Intelligent Operating Solutions and Advanced Healthcare Solutions segments.

The Genesis of a Focused Powerhouse

Fortive Corporation, established in 2015, has consistently positioned itself as a provider of essential technologies for connected workflow solutions across a diverse array of end-markets. From its inception, the company structured its operations into strategic segments: Intelligent Operating Solutions (IOS), Precision Technologies (PT), and Advanced Healthcare Solutions (AHS). This foundational structure allowed Fortive to leverage leading brand names, innovative technologies, and significant market positions globally, all underpinned by its proprietary Fortive Business System (FBS). FBS is more than a set of tools; it is a cultural cornerstone, driving continuous improvement, operational efficiency, and a disciplined approach to problem-solving across the enterprise.

The company's history is marked by a strategic evolution of its portfolio, aimed at enhancing its durability and growth profile. Key acquisitions, such as Pruftechnik in 2019, bolstered its industrial offerings, while the January 2024 acquisition of EA Elektro-Automatik Holding GmbH (EA) expanded its high-power electronic test solutions. This proactive portfolio management culminated in a significant strategic pivot: the spin-off of the Precision Technologies segment, now Ralliant Corporation , on June 28, 2025. This separation was designed to create a simpler, more focused Fortive, with its recurring revenue profile increasing to approximately 50%, thereby enhancing its resilience and accelerating its financial performance.

Technological Edge: The Engine of Differentiation

Fortive's competitive moat is deeply rooted in its differentiated technology and a relentless pursuit of innovation, which translates directly into tangible benefits for its customers and robust financial performance for investors. The company's core strength lies not in a single technology, but in its integrated application of advanced instrumentation, software, and services to create connected workflow solutions across diverse industrial and healthcare environments. This approach allows Fortive to deliver superior precision, efficiency, and safety compared to conventional alternatives.

In its Intelligent Operating Solutions (IOS) segment, Fluke exemplifies this technological leadership. Its 1670 Series Multifunction Installation Tester, integrated 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. This highlights its market-leading innovation. Furthermore, Fluke Reliability's Shaft Alignment solution, leveraging Pruftechnik's single-laser alignment tools, offers quantifiable benefits: it can reduce utility costs by approximately €1,624 to $1,758 annually for a single 75 KW pump with a minor misalignment, and addresses a leading cause of 50% of unplanned downtime in rotating machines. This precision technology extends asset life and optimizes maintenance schedules, directly impacting customer profitability.

Fortive's software businesses are also at the forefront of technological advancement. Gordian's new cloud-based assessment and capital planning module is driving "double-digit orders growth," demonstrating strong market adoption for its digital solutions. In Advanced Healthcare Solutions (AHS), Provation has launched AI assistants and intelligent automation to enhance healthcare workflows. Its proprietary data analytics tool, Apex Insight, has contributed to a 67% increase in Apex SaaS sites in 2024, boosting provider productivity and enabling informed decision-making. This focus on AI-driven solutions and SaaS conversion positions Provation for continued share gains as healthcare systems increasingly adopt cloud-based platforms.

ASP, within AHS, is innovating to improve patient safety and operational efficiency. Its new ULTRA GI Cycle, designed for duodenoscope reprocessing using hydrogen peroxide gas plasma sterilization, significantly improves safety for both patients and technicians while offering environmental benefits. The expansion of its steam monitoring biological indicator to over 30 countries underscores the global demand for its advanced infection prevention solutions. These innovations contribute to Fortive's competitive moat by enabling higher average selling prices (ASPs), fostering customer loyalty through superior performance, and driving accretive software growth, which in turn expands margins and reinforces market leadership.

Competitive Arena: Fortive's Strategic Positioning

Fortive operates in a highly competitive landscape, facing established industrial and technology conglomerates such as Danaher Corporation , Honeywell International Inc. , Emerson Electric Co. , and Rockwell Automation Inc. . Fortive's strategic positioning is defined by its deep operational excellence, driven by the Fortive Business System (FBS), and its focused innovation in niche, high-value markets.

Fortive's FBS-driven operational efficiency is a significant competitive advantage. It has enabled the company to expand adjusted operating margins by over 600 basis points on average over the last five years, achieving approximately 60% incrementals in the third quarter of 2024.

This operational rigor also underpins its supply chain resilience, evidenced by a 70% reduction in exposure to China imports since 2018. This contrasts with broader conglomerates like Honeywell (HON), which, despite its scale, can face supply chain vulnerabilities. Fortive's high gross profit margin of 59.78% (TTM) and operating profit margin of 17.22% (TTM) are competitive, often exceeding peers in its specialized niches. For instance, while Honeywell's TTM operating profit margin is 20%, its gross profit margin is 38%, significantly lower than Fortive's, suggesting Fortive's product differentiation and pricing power are superior in its core offerings. Similarly, Emerson (EMR) and Rockwell Automation (ROK) exhibit lower TTM gross profit margins (45% and 39%, respectively) and operating profit margins (15% and 14%, respectively) compared to Fortive, underscoring Fortive's ability to capture value through its specialized solutions.

Fortive's focus on connected workflow solutions and precision tools provides a distinct value proposition. Its offerings in ruggedized test tools and calibration services, for example, deliver greater precision in industrial applications compared to Honeywell's broader portfolio. In healthcare, Fortive's advanced sterilization and test solutions offer higher reliability in critical applications, differentiating it from Rockwell Automation's factory automation software. While Danaher (DHR) excels in life sciences and diagnostics, Fortive's emphasis on versatile, end-to-end solutions for manufacturing and utilities provides a unique value proposition where comprehensive service integration is paramount.

Despite these strengths, Fortive faces vulnerabilities. Its exposure to cyclical industrial sectors like EV mobility and broader semiconductor markets, particularly in Western Europe and China, can lead to revenue volatility, as seen with EA Elektro-Automatik. Furthermore, sensitivity to government spending and evolving healthcare policies, as experienced by Gordian and the AHS capital equipment businesses, can impact demand. However, Fortive's strategy of diversifying its revenue streams, with approximately 50% recurring revenue post-spin, helps mitigate these cyclical pressures. The company's active management of tariff impacts through pricing actions, supply chain shifts, and productivity initiatives further demonstrates its proactive stance against external headwinds.

Financial Resilience Amidst Shifting Tides

Fortive's financial performance in recent periods underscores its operational resilience and the effectiveness of its strategic evolution, even amidst a dynamic macroeconomic backdrop. The full year 2024 saw Fortive deliver a 1% core revenue growth, with adjusted operating profit increasing by 7% and margins expanding by 100 basis points, reflecting impressive 60% incrementals. This culminated in adjusted EPS of $3.89, a 13% increase year-over-year, and a record free cash flow of $1.4 billion, representing robust 23% free cash flow margins.

The second quarter of 2025, the final quarter before the Ralliant spin-off, demonstrated Fortive's ability to maintain profitability despite unexpected top-line pressures. For the continuing operations (New Fortive), total revenue saw a slight decline of 0.4% year-over-year, with core revenue down 0.7%. This was primarily due to late-quarter customer demand responses to macro pressures, including tariff uncertainty impacting Fluke's professional instrumentation sales (leading to increased backlog) and constrained U.S. government spending affecting Gordian's procurement revenue. In the Advanced Healthcare Solutions (AHS) segment, core revenue declined 1.9% due to U.S. hospital capital expenditure deferrals linked to reimbursement policy changes.

Despite these revenue headwinds, Fortive's operational discipline shone through. Adjusted gross margins for New Fortive remained roughly flat, as FBS-driven pricing actions, growth in higher-margin recurring revenues, and lower supply chain costs largely offset tariff-related pressures. Adjusted EBITDA also remained flat, and adjusted EPS grew 4% year-over-year to $0.58, benefiting from stable EBITDA, lower interest expense, and share repurchases. The company generated $180 million of free cash flow in Q2 2025, contributing to a solid trailing 12-month free cash flow of $939 million, a 14% year-over-year increase with a 107% conversion rate on adjusted net income.

Fortive's liquidity position is robust, further bolstered by the Ralliant spin-off. The company received a $1.15 billion dividend from Ralliant , of which approximately $725 million was used in July 2025 to pay down debt, including Japanese yen and euro-denominated term debt and a portion of its 2026 euro bonds. This strategic debt reduction has brought Fortive's gross leverage ratio to roughly 2.5x adjusted EBITDA, aligning with its stated target and providing ample capacity for future capital deployment, including further share repurchases.

Outlook and the Path Ahead

Fortive is initiating its full-year 2025 adjusted EPS guidance for the new, continuing operations at $2.50 to $2.60 per share. This outlook is grounded in a prudent assumption: a continuation of the market dynamics experienced in Q2 2025, without forecasting any material improvement or deterioration. It fully incorporates the expected net impact of tariffs, which are projected to have a gross impact of approximately $40 million to $55 million in the second half of 2025, with an annualized impact of $80 million to $120 million, predominantly from U.S.-China tariffs.

The company's strategy to mitigate these tariff impacts is well-defined, leveraging its proven FBS playbook. Countermeasures include strategic pricing actions and surcharges, shifts in its global supply chain and manufacturing footprint, and incremental cost and productivity initiatives. Fortive anticipates that these gross tariffs will be fully mitigated by the fourth quarter of 2025, though a modest gross margin and EPS headwind is expected in Q3 as countermeasures continue to phase in.

From a phasing perspective, Fortive expects Q3 reported revenue to be broadly similar to Q2, with a modest tailwind from foreign exchange rates. Second-half core revenue growth is modeled to be broadly in line with the first half. Specifically for Advanced Healthcare Solutions, core growth in the second half is also expected to be similar to Q2, albeit with a more challenging year-over-year comparable in Q3. The full-year adjusted effective tax rate is projected to be in the mid-teens, with Q3's rate in the high teens and Q4's in the single digits due to discrete tax items. This, combined with lower interest expense from reduced debt balances and the positive impact of share repurchases, is expected to result in Q4 adjusted EPS being meaningfully higher than Q3.

Key Risks and Strategic Countermeasures

While Fortive's strategic direction and operational strengths are compelling, investors should be mindful of several key risks. Macroeconomic and policy uncertainty remains a significant factor, with potential impacts from geopolitical events, evolving government policies on trade, healthcare, and fiscal matters, and the ongoing effects of the "One Big Beautiful Bill Act (OBBBA)." The volatility in global trade and fiscal policy could continue to affect near-term revenue visibility, as demonstrated by the late-quarter demand pressures in Q2 2025.

Another area of consideration is potential indemnification liabilities to Ralliant Corporation stemming from the separation agreement. While Fortive has established a framework for allocating assets and liabilities, there's a risk that indemnity rights may not fully protect Fortive or that Ralliant (RLGT) may be unable to satisfy its obligations. Furthermore, the company continues to manage stranded costs associated with the spin-off, with approximately half already addressed and the remainder expected to be resolved over the next 12 months.

Fortive is actively deploying countermeasures to mitigate these risks. Its disciplined capital allocation strategy, which prioritizes organic growth, accretive bolt-on M&A, share repurchases, and a growing dividend, is designed to enhance shareholder returns while maintaining financial flexibility. The company's deep-rooted FBS culture enables rapid adaptation and response to market shifts, ensuring that it can continue to drive productivity and manage costs effectively.

Conclusion

Fortive has successfully executed a pivotal strategic transformation, emerging as a more focused, high-margin enterprise centered on essential connected workflow solutions. Its core investment thesis is built upon the powerful combination of the Fortive Business System, relentless innovation in areas like AI-powered software and precision instrumentation, and a robust recurring revenue model. These foundational strengths provide a durable competitive moat, enabling the company to differentiate its offerings and maintain pricing power against a diverse set of industrial and technology peers.

Despite recent macroeconomic headwinds and policy uncertainties, Fortive's operational resilience has been evident in its ability to sustain profitability and strong free cash flow. The company's clear outlook for 2025, supported by concrete guidance and a proven playbook for tariff mitigation, reinforces confidence in its ability to deliver consistent financial performance. As Fortive embarks on this new chapter, its strategic clarity, technological leadership, and disciplined capital allocation position it for accelerated profitable growth and enhanced shareholder value creation in the years to come.