Fortive Corporation (FTV) Q4 2018 Earnings Report, Transcript and Summary

My name is Ian, and I will be your conference facilitator to -- this afternoon. At this time, I would like to welcome everyone to the Fortive Corporation's Fourth Quarter 2018 Earnings Results Conference Call. [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, Ian. 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. A replay of the webcast will be archived on the Investors section of our website later today under the heading Events and Presentations and will remain archived until our next quarterly call. A replay of the conference call will be available shortly after the conclusion of this call until Friday, February 22, 2019. Instructions for accessing this replay are included in our fourth quarter 2018 earnings press release. We completed the divestiture of the Automation & Specialty business in the fourth quarter on October 1, 2018, and accordingly, have included the results of the A&S business as discontinued operations for current and 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, 2017, 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'd like to turn the call over to Jim.

Thanks, Griffin, and good afternoon, everyone. Our performance in the fourth quarter provided a strong finish to 2018, capping off another transformational year for Fortive. Looking at the full year, we generated adjusted earnings per share of $3.06 on a continuing operations basis, a 25% increase year-over-year, driven by 4.1% core revenue growth and 35 basis points of core operating margin expansion. The strong top line performance of our core portfolio reflected solid execution against a range of ongoing growth initiatives as we drove product innovation and invested in our market-leading brands in order to continue to enhance our competitive advantage, take market share and position Fortive for sustained outperformance over the long term. Over the course of 2018, our team significantly accelerated the portfolio transformation process that we have pursued since our spin. During the year, we announced several strategically significant transactions, including the acquisitions of Gordian and Accruent, the divestiture of the A&S business to Altra and the pending acquisition of Johnson & Johnson Advanced Sterilization Products business. These transactions greatly advance our stated strategy to reposition the portfolio in higher growth, less cyclical markets. Taken together, the total acquisitions announced since the spin represent $1.7 billion in total revenue on an annualized basis, growing at a high single-digit rate. These acquisitions, which average 70% recurring revenue, greatly enhance the recurring revenue profile of the Fortive portfolio. The acquisitions of Gordian and Accruent advance the execution of Fortive's digital strategy which is focused on addressing a range of critical software-enabled workflows for our customers. Both Gordian and Accruent are off to a good start, demonstrating growth momentum through the end of the year. Turning to ASP. We made significant progress during the fourth quarter employing the Fortive Business System to prepare for a successful transition of the business to the Fortive family. Consistent with what Johnson & Johnson recently announced, we now expect to close the transaction late in the first quarter or early in the second quarter of 2019. We're very excited about the contribution ASP will make once it's integrated into Fortive, and we look forward to discussing the company and the opportunities ahead when the transaction closes. With that, I'd like to turn to the details of the quarter. Adjusted net earnings were $325.1 million, up 30% over the prior year, and adjusted diluted net earnings-per-share were $0.91. Sales grew 11.4% to $1.8 billion, reflecting a core revenue increase of 7.4%. All platforms posted core revenue growth highlighted by Transportation Technologies, product realization and sensing technologies as well as very strong performance of Fluke and Industrial Scientific. Acquisitions, including Gordian and Accruent, contributed 580 basis points of top line growth, while unfavorable foreign exchange rates reduced growth by 180 basis points. Geographically, high-growth markets core revenue grew high single digits with continued strength in Asia and Latin America. This growth was led by Gilbarco Veeder-Root, Tektronix and Fluke. China, in particular, posted a strong quarter with low double-digit growth. While we remain cautious about certain parts of the China market, we are pleased with the continued outperformance in the fourth quarter and our strengthening competitive position. Developed markets' core revenue grew high single digits, reflecting continued strength in North America. Core revenue growth in North America was high single digits, led by strong performances at GVR, Fluke, EMC and Industrial Scientific. Western Europe grew low single digits, led by high single digit growth at GVR and Sensing Technologies and mid-single-digit growth at Tektronix. In the fourth quarter, we posted a gross margin of 51.1%, our fifth consecutive quarter of gross margins at or above 50%. Pricing accelerated to 80 basis points with four platforms delivering positive price during the quarter. Operating profit margin was 16.8% with core operating margins increasing 40 basis points as strong PPV and productivity were partially offset by the dilutive impact of tariffs in unfavorable mix during the quarter. During the fourth quarter, we generated $387 million of free cash flow, representing a seasonally strong conversion ratio of 166%. We generated free cash flow for the full year of $1.1 billion, an increase of $180 million or 20% on a year-on-year basis. We were also pleased to see our annual free cash flow conversion increase to 120%, an 800 basis points increase from the prior year. Turning to our segments. Professional Instrumentation posted sales growth of 14%, including core revenue growth of 5.2%. Acquisitions contributed 1,020 basis points, while unfavorable foreign exchange rates reduced growth by 140 basis points. Reported operating margin of 16.1% reflected 545 basis points of dilutive operating margin associated with acquisitions and transaction expenses. Core margins were flat, reflecting the dilutive impact of tariffs at Fluke and Tektronix and some one-time warranty-related expenses in the quarter. Advanced Instrumentation & Solutions core revenue increased mid-single digits during the quarter, driven by continued outperformance at Fluke and ISC and strong growth at Tektronix. Field solutions core revenue grew low single digits, highlighted by mid-single-digit growth in developed markets, including strong performance for Fluke and ISC in North America. This growth was partially offset by a slight decline in high-growth markets due to continued weakness at Qualitrol. China, however, posted a strong quarter with low double-digit-core growth. Fluke delivered mid-single-digit core growth, led by midteens growth at Fluke Calibration, and mid-single-digit growth at Fluke Industrial. Fluke had a strong finish to the year in China, highlighted by the increasing momentum behind Fluke's e-commerce efforts, which saw strong point of sale increases and continued share gains for its handheld products. Fluke Health Solutions saw a strong contribution from Landauer, which performed ahead of our expectations in its first full year within Fortive. The team leveraged FBS both commercially and in the factory, finishing with mid-single-digit growth and 270 basis points of gross margin expansion for the year and positioning the business to deliver strong returns in 2019 and beyond. We're excited about the progress we continue to see at Fluke Digital Systems. The eMaint CMMS offering continues to deliver strong growth, up greater than 20% for the quarter and full year. Fluke's innovative sensor offerings were a key element of its digital strategy needed to generate a strong positive response from customers, including the Fluke 3561 Vibration Sensor, which was recently named a 2018 Breakthrough Product by Processing Magazine. Industrial Scientific delivered low double-digit growth, led by North America and Asia. iNet saw greater than 20% growth for the quarter, while rental revenue increased high single digits. During the quarter, ISC completed the transition of the iNet offering to a fully cloud-based solution, enabling the delivery of better speed and uptime to our customers. ISC's commitment to FBS continues to yield strong operational improvements, including a significant decrease in working capital and related increase in free cash flow over the course of the year. Qualitrol's core revenue declined high teens during the quarter, in line with our expectations, reflecting continued softness across its core geographic markets. We continue to expect the soft market conditions that challenge Qualitrol throughout the year to remain a headwind well into 2019. Product realization core revenue increased high single digits for the quarter, led by high single-digit growth at Tektronix and midteens growth in EMC. EMC posted a record quarter for revenue as it delivered against the backlog it carried into the quarter, including the volume that had been subject to customer-related delays, as mentioned last quarter. Given strong order flow, EMC finished the year with record backlog, setting up well for continued growth in 2019. Growth at Tektronix was broad-based across both developed and high-growth markets. Developed markets saw mid-single-digit growth, driven by Japan, North America and Western Europe. We are pleased to see another quarter of double-digit growth for Tek in China driven by strong performance at Keithley. Tek continues to benefit from momentum it has generated from its targeted higher growth end markets. New product introductions remain a key driver of Tek's growth, reflecting the continued momentum behind the 5 and 6 Series oscilloscopes, which saw key customer wins in both the automotive and power end markets during the quarter. Our sensing technologies platform increased high single digits in the quarter. All of the platforms' major regions saw strong growth, including high single-digit growth in Western Europe and mid-single-digit growth in North America and China. The strong performance in the quarter was driven by industrial and medical end markets as well as revenue shifted from the previous quarter due to hurricane-related delays. We are excited about the number of new product initiatives across the sensing platform that launched in the fourth quarter, including the Setra next-generation industrial pressure transducer, the AXD, which is well positioned to gain market share based on superior range of features and functionality. Moving to our Industrial Technologies segment. Revenue grew 8.1%, including core revenue growth of 10.3%. Unfavorable foreign exchange rates reduce growth by 230 basis points. Reported operating margin of 20.5% reflected a core operating margin increase of 95 basis points, driven by the incrementals on the strong volume in the quarter. Our Transportation Technologies platform core revenue grew low double digits, led by greater than 20% growth in high-growth markets and low double-digit growth in developed markets. Gilbarco Veeder-Root delivered midteens core revenue growth, driven by midteens increase in developed markets and a greater than 20% increase in high-growth markets. Developed markets were led by North America, reflecting strong EMV sales. As expected, Gilbarco continue to see an acceleration in EMV sales, including a major customer win at Murphy's USA and the continued strength of our programs with Shell and Chevron. China saw midteens core growth driven by continued demand at Veeder-Root for submersible pumps and automatic tank gauges related to ongoing double-walled tank upgrades. GVR's performance in high-growth markets also included significant growth in India and synergies from the combined Gilbarco and Orpak product offering continue to drive share gains to enhance GVR's strong position in that market. Orpak continues to perform well globally, exceeding expectations and generating greater than 50% of revenue from software to enhance GVR's recurring revenue profile. TeletracNavman declined low single digits as low double-digit core growth in Asia Pacific was more than offset by high teens decline in North America. TeletracNavman continues to perform well in Asia Pacific where the fourth quarter represented the 11th quarter out of 12 with double-digit core revenue growth. In North America, we have continued to experience a high level of customer churn which remains a headwind for the business in 2019. Moving to franchise distribution. The platform grew core revenue low single digits. Matco delivered low single-digit growth, reflecting strong performance from diagnostic and specialty tools. Tool storage grew low single digits during the fourth quarter, and we are pleased with that -- with how that category performed over the second half of 2018, particularly within our premium tool storage product line. Matco's Maximus 3.0 diagnostic scan tool platform continues to perform well, driving improving growth in diagnostics category and accelerating recurring revenue opportunities from the sale of MaximusFix, Matco's proprietary subscription-based automotive repair database. The Max 3.0 is expected to be a consistent growth driver in the coming quarters as Matco continues to roll out additional features and enhancements in the platform. To wrap up, we ended the year with a significantly enhanced portfolio with exposure to better end markets tied to attractive secular drivers, reduced cyclicality, a growing share of recurring revenue and consistently robust free cash flow. This enhanced portfolio has us well positioned to continue to drive organic growth and innovation while also deploying our growing free cash flow into acquisitions that will accelerate our strategy and enhance our long-term competitive advantage. Alongside this portfolio of transformation, we continue to generate strong core operating results consistent with the Fortive formula, driving full year adjusted earnings growth of 25% and increasing free cash flow conversion to 120%. This year, once again, demonstrated the power of the Fortive Business System, enabling our team to execute a series of complex capital allocation strategies to transform our portfolio while driving innovation to better meet our customer need and delivering sustained top quartile earnings growth for our shareholders. Turning to the guide. We are initiating our full year 2019 adjusted diluted net EPS guidance of $3.40 to $3.50, representing year-over-year growth of 11% to 14% on a continuing operations basis. This does not include any contribution from the pending acquisition of ASP. The guide also assumes 3% to 5% core revenue growth, core operating margin expansion of 50 basis points, an effective tax rate of 17% and free cash flow conversion ratio of greater than 120% for the year. The adjusted diluted net EPS guidance also reflects the dilutive impact from the mandatory convertible preferred stock on an if-converted basis. The fundamentals across our enhanced portfolio remain strong, and we once again expect to outdeliver -- outperform and deliver sustainable double-digit earnings growth in the year ahead. We are also initiating our first quarter adjusted diluted net EPS guidance of $0.64 to $0.68, which includes an assumption of 3% to 4% core revenue growth, core operating margin expansion of 25 to 50 basis points and an effective tax rate of 17%. In closing, I'd like to extend my personal thanks and appreciation to our Fortive teammates across the world for their continued dedication to our shared purpose of delivering essential technology for the people who accelerate progress. It is the commitment of our team which provides the foundation for our enduring culture of continuous improvement and it enables us to consistently deliver value for our customers and top quartile returns for our shareholders. With that, I'd like to turn it over to Griffin.

Thanks, Jim. Before we move into questions, I'd like to take this opportunity to announce that Fortive will host its Annual Investor and Analyst Day on May 16, 2019, in New York City. Further details will be circulated soon. That concludes our formal comments, and we're now ready for questions.

[Operator Instructions]. Our first question is from the line of Scott Davis from Melius Research.

I wanted to reconcile a little bit -- guys, and I know you don't have all the answers in the world, none of us do on China, but you said cautious on China, but all your numbers looked really pretty strong across the board. Is there anything in your forward order book or anything more tangible other than kind of what we all read in the newspaper?

Well, I think there's a couple of things, Scott. One, yes, you're right, we had another very strong year of performance in China. We finished strong. I suspect some of that had to do with maybe a little bit of business that maybe got pulled in as people were maybe avoiding price increases and stuff, but unbalanced, a very strong quarter fourth quarter for China as you identified. I think we are basing this on a couple of things. One, we're going to sunset some slower -- the -- like the double-walled tank upgrade at Gilbarco, as an example, that's going to slow down a little bit in the back half of the year. So that's one thing that we kind of know. We certainly think that we've seen some -- we believe there will be some slowing of some of the business at Tektronix, and we've seen that a little bit in the order book, still good growth, mid-single-digit growth, but probably a little slowing up as double digits that we've been in. So those are couple of examples. We continue to believe we're outperforming, and certainly it's early days. You've heard me say this a few times that January and February don't tell you a lot in China. You really have to get to March before you have a sense for that. And so I think we'll -- as we turn the corner in the first quarter, we'll have a better sense if that number has some upside to it.

Okay. Fair enough. And then, I'm normally not nitpicky like this but I'll say it anyways. So your 50 basis point margin guide -- I mean, you lost about 50 bps in a year to acquisitions, I think, on the gross margin line at least, and I would think getting those businesses kind of back to some sort of level of fully integrated and normal could be a nice tailwind. I guess what I'm asking is, how much of that 50 bps is fixing what you bought versus what you're going to get naturally out of your 4% core revenue growth midpoint number?

So the 50 bps for the year, we've always got things that happened during the year and every year. So there's got some pluses and minuses. And so yes, the -- we will fix some of those things at the end of the year and they won't repeat. There could be other things that come in, but that -- we might have upside to that number for the year. But we are having to overcome the impacts of tariffs. And while we've offset them at the EPS level, when you take price to offset the tariffs, that falls through at zero OMX, zero OPs, so it gives you a little bit of an optical headwind there.

And our next question is from the line of Julian Mitchell from Barclays.

Just a first question maybe on the first quarter guidance. So you have core growth guided pretty similar for Q1 as for the year. EPS, though, is starting out kind of flattish year-on-year with the total year up low double digit. So maybe just help us understand the bridge there. Is it all about a lot of FX headwinds in the quarter? And then the margins, it's the tariff issue and some cost inflation? Maybe just any color on that.

Yes, thanks, Julian. A couple of things. As you noted, there's FX, we're got $0.04 of FX headwind in the year. Half of that is sitting in Q1. So there's a couple pennies there. Our tax rate is up year-over-year. We had -- it's 17%, still really good. Those are the -- those are probably three big things they caught. And while I think we're guiding nominally lower in Q1 at 3% to 4% rather than 3% to 5% for the year, and that's reflecting maybe a little stronger finish in Q4. I think those are the main puts and takes there.

Understood. And then my second question, when we're thinking about professional instruments, specifically, what kind of core incremental margins should we expect for 2019 in terms of expansion? And maybe how quickly do we see that? Or do you anticipate Q1 you still have a bunch of these maybe warranty issues and inflation to get over? I guess I'm trying to ask how back-end loaded you think the core margin expansion is at PI this year.

No, so the warranty impact is a one-time that we booked in Q4, and so that's not going to be a drag going forward. Normally, I think what we would expect probably 30% to 40% in VCM's incrementals falling through in the quarter and in the year. And just on the back-end loaded, I think we're pretty level loaded after Q1.

And our next question is from the line of Steve Tusa from JPMorgan.

You mentioned the price-offsetting tariffs. What is the level of price you have embedded in that 3% to 5%?

Probably, well, we did 80 bps of price in Q4, and now we expect it to trend up from there as it has done all year. It might -- it probably would get all the way to 100 bps, 1%.

Okay. And then on the -- on GVR for the year, what are you assuming for growth in GVR? And how much of that is a function of -- I guess you mentioned there was the other regulation dropping off, but obviously the EMV stuff is rolling in here. So maybe just talk about how fast GVR can grow and then what you're expecting on kind of headwinds and tailwinds from these various regulatory drivers.

Yes, so Steve, it's Jim. So I think we're sort of looking at mid-single digit with -- at Gilbarco right now for the year. They finished stronger than we expected so some of that overage in the fourth quarter was certainly Gilbarco with double-digit growth in the quarter. So we think they're -- well, they're going to continue to be strong through the year. And while the double wall had some impact on our overall China number, in the big -- in the bigger business that we have at Gilbarco, it's not going to be a tremendous headwind. So they've continued to do well in other high-growth markets like India. So we think on balance, their high-growth business will be pretty good this year. Those markets are a little lumpy, so it can move around from quarter-to-quarter, but we think the high-growth markets from Gilbarco will be good this year. And then back to EMV, we feel -- we saw good business, we saw strength, and customers clearly are starting to think about the trends going forward and some of the things that they need to do to be in compliance by the end of 2020. So I think, as we said in July, we saw -- I think Gilbarco played out slightly stronger than we thought where we were when we were in July.

Why wouldn't Gilbarco be better than mid-singles than -- if that's the case? Don't you have really easy comps here in the first half of the year? I mean -- or you're just being conservative on this front?

I think, like anything else, we -- the year, there's certainly probably potential upside, but I think at the end of the day, we did finish very strong. So the fourth quarter does impact the full year number. It will probably be a little bit better in the first half than that number, and then -- but then obviously were going to have a really tough comp off the double-digit number that we just posted in the fourth quarter. So yes, we'll probably -- you'll probably see some higher growth rates probably as an example in the first quarter. If you remember, we had some ERP issues last year in the first quarter, so we will see probably higher than that mid-single-digit number in the first quarter for sure.

And our next question is from the line of Andy Kaplowitz from Citi.

Jim, could you talk about Western Europe actually? I mean, it was up low single digits which is better than last quarter, I think you were down low single digits. And as you know, there are concerns about growth over there. So what actually improved in the quarter? And what's embedded in your growth forecast for 2019 in that region?

You're -- Andy, you're talking about Western Europe, right?

Yes, correct.

Yes, so we were a little better -- still low single digit in the quarter, in the fourth, Andy, than -- so that came in around where we thought it was going to come in, and we've been a little down in, I think, in the third quarter. So even though the fourth quarter was a little better than the third, we still think Europe is probably low to low single kind of environment, maybe until -- maybe touches mid-single, but I think we still are conservative on the European forecast right now based on a lot of the things we've seen, and we all know about and just things we've seen as an example on a point of sale. We had -- one of the drivers in the quarter was Gilbarco. We've had a pretty good mid-single-digit quarter in the fourth, and we don't expect necessarily that to continue through in Europe for the whole year, so -- of 2019, so I think a low single-digit kind of view of Western Europe is kind of where we're at right now.

And I was intrigued by your comments on China in the -- to the extent that you said that your competitive position continues to strengthen there. So maybe you can elaborate that on a bit -- elaborate on that a bit. I think you mentioned e-commerce at Fluke, obviously you're doing well in GVR. So could you materially beat in terms of market share in 2019 and as you go forward versus the market in China?

Yes. I think the Fluke performance for the quarter was very good, and obviously we've got a long history there of building products for that market, building and having both production and design capability over there to really build product -- really beat China for the China market. And so I think we just continue to build the business. Ironically, and I think a great example of our benchmark, a lot of e-commerce efforts that we've put in over there really came from Tektronix, and they started that. So I think it's a great example of learning from each other in those businesses. So I think certainly, we have pretty good sense that we're doing pretty well in the places you just mentioned. And our Tek performance is good. It's always hard to gauge against others there from a share position. Things kind of move around, but I think we'll now have had three years in a row of double-digit growth in China, so those numbers feel pretty good. So those are our three biggest businesses, and that's the basis for kind of our belief that we're outperforming, if you will, and I think we can continue to outperform as well.

And you're thinking mid-single-digit growth for China in 2019 based on what you have noted up?

That's right. That's where we're at right now. I think as I mentioned before, having been in China a lot over the course of 20 years, January and February don't because the Chinese New Year don't give you a lot of color. You really got to get into March. So our best view right now with what we've seen from a point of sale perspective and what customers are telling us is mid-single digit.

And our next question is from the line of Jeffrey Sprague from Vertical Research.

Just two things for me. Just first, on J&J, closed maybe a little bit later than you hoped, but relative to your expectation, should we still be thinking about kind of roughly $0.30 on an annualized full year run-rate basis for the first full year of ownership?

Yes, I think nothing's changed from the first four quarters moving forward. I think that's -- I think we said $0.30 to $0.35 last quarter and nothing's changed from that.

Okay, great. And then with respect to the EMV question, maybe a little bit to Steve's point, I just thought '19 would be a little bit stronger, too, to avoid maybe kind of a big fire drill in 2020 on the compliance deadline. Do you see a situation lining up where 2020 is kind of a big scramble? Or do you expect kind of a smooth acceleration into that compliance deadline?

I think what we've seen -- first of all, we had a stronger finish in '18. So that has some -- as I mentioned before. So we still think '19, with the numbers we're seeing, are going to be -- they're going to be good numbers. Jeff, I think at this point, we're starting to think more of the other way, that things are going to move and stretch into 2021 a little bit more. So no one's got a perfect crystal ball here right now, but as we talked to folks, we think people are going to make decisions based on their liabilities, so some of the larger customers are looking at where they're -- where they've had liability thus far, and we'll make some intelligent decisions about their upgrades based on that. So our crystal ball right now probably says things are -- continue to be good, but they probably push into 2021 right now.

And our next question is from the line of John Inch from Gordon Haskett.

I think, Jim, you said Tek in China is going to go from double digit to mid-single in 2019. What -- based on the guidance, what actually happens to Fluke and Tek in -- based on your guidance 2019? And what do they do in 2018, if you could remind us?

Corporate? You mean for China or...

No, no, no, I was getting to China data point. I didn't hear what you'd -- if you had said anything about Tek overall. So just what's the Fluke and Tek in 2018 versus 2019 core growth roughly based on your assumptions?

Yes, I think Fluke's mid-single '18, mid-single '19. Tek is mid-single, and I think they had a stronger finish in '18. So I think they got them to mid-single, and they're probably closer to low single -- low to mid in 2019. So hopefully, that's helpful.

Yes -- no, that's right. That makes sense. The 3% to 5% guide, what about the deals that we've done -- like how much of -- the recently acquired acquisitions, how much do they contribute in the collective 3% to 5%? I think you said -- Chuck, you said pricing's a percent, what about the other businesses that we've done recently?

Look, so the only thing -- that 3% to 5% is a core growth, so that only include -- it only -- it includes the Landauer and ISC and Orpak. And so I think I calculated it, that was like 30 basis points. The more recent ones, they won't turn core until the fourth quarter of next year.

Okay. So still pretty small, all right?

Yes.

And then, Jim, if you were not to read the newspapers but simply just think about your businesses, what are you most concerned about in 2019? So again, not macro stuff because we're also concerned about that, but just if you think about the businesses, how they lined up, what do you -- where do you want to apply the most pressure as CEO in an operations basis? Where do you feel like you've got to kind of focus the most attention if there's an issue at all in 2019?

Yes, it's a great question, and probably I could give you -- I could go for a half hour on it. But I would say as we think about -- maybe start with how we think about risk. Certainly, we're -- we -- I think, and it's impossible, not only reading the paper, but also seeing in our own business, and I mentioned this before, Western Europe continues to be a watchful eye. It's not our biggest geography, but certainly some of the things we've seen out of Germany, as an example, would have us watching out to make sure that we're prudent in what we're doing over there. China could go up or down. It's probably a risk and an opportunity regionally. I think operationally, as we think about it from a business perspective, we certainly want to make sure we take advantage of the opportunities that are in front of us relative to GVR and the EMV opportunity. We mentioned in the prepared remarks, as an example, the Murphy's USA order that we got, that was a big win for. We want to continue to have those big wins and to continue to convert those into revenue opportunities and increase our installed base over time. So I would say GVR. And then more broadly, we're always -- John, we're always working to accelerate innovation. We've put a big effort into digital analytics and IoT in a number of our businesses. You see -- you've heard us talk about some of those successes like Fluke Digital. Certainly, Gordian or Accruent are going to -- we're learning a lot from them as well, how to accelerate some things. So that's probably all that -- we're going to have leadership conference here in a few weeks, and those would be -- a number of the things we're going to be talking about and focused on as we talk to our top leaders in the business.

And our next question is from the line of Richard Eastman from Baird.

Could we just -- can you just give us kind of a quick update on Gordian and Accruent? Just trying to get kind of year-over-year growth rates there. I mean, even though they're not core, I'm just curious, are they pacing out at the growth that you expected and just kind of what the demand and order rate look like?

Yes, I think we had a high single-digit growth rate in -- for Accruent last year, and we delivered ahead of where we thought we'd be, although, as we said, only a few months of our own ownership, so we won't take any credit there. Gordian, probably a little bit better from a growth rate, more closer to double digits. And again, they did a nice job as well. So we -- so far, they've gotten out of the gate well. We were with the Accruent team in -- a few weeks ago for their 100-day strategic plan, and the energy and enthusiasm about what they can do and what we can do together is still -- I think is really -- really makes for -- I think both are going to be -- it's going to be great businesses for us going forward. I think you'll start to see those growth rates I just mentioned are probably the growth rates for '19 as we look at things and -- but we'll continue to look. We're certainly looking as we finish their 100-day strategic plans, Rick, as you know, because you know us well. We'll look for opportunities to invest into more growth opportunities to accelerate some of those growth rates and those things -- because of the softer nature of the business, some of those probably won't start to really take an impact until the latter half of '19 and into '20.

And do you spend any time at all trying to look and correlate the ABI with Gordian's demand? Could you...

Say a little bit more on that. Correlate their demand with?

With the ABI Index Construction...

Yes.

There's a lot of concern around that but...

Right, right -- no, sorry, I didn't catch -- I didn't hear the A part of that. The -- no, I -- we haven't found a lot of correlation there yet I think because it's -- in their case, it's such an underpenetrated market that, that's actually happening from projects versus just the ability to grow the business just by increasing the penetration of their offering. It's such an opportunity that it doesn't necessarily correlate as well as one might think.

Fair enough. And just a last question, around the PI Sensing businesses, it's kind of your -- maybe your fourth-largest maybe set of businesses, and one would think there's some cyclical sensitivity to those businesses around automation, perhaps around China. But they finished the year strong. Is there anything in the order rate that might give you pause in that -- in those kinds of sets of businesses, Gems and...

They're likely to decel a little bit in '19. So they were most -- as a platform, they were a stronger mid-single-digit grower. And in '19, they might slow a little bit too low to mid-single. So I think it's still early to tell but there will be a little bit of slowing that's possible. But I think we still see a lot of opportunities. We mentioned in the prepared remarks that Setra had some nice introductions in technology. We've also seen -- we've taken the businesses into what I would call maybe a little bit less cyclical markets like food and beverage and some critical environment applications. So I think the teams have done a really nice job of trying to reposition the businesses under verticals that maybe are less -- in the less cyclical markets like some of them that you just mentioned.

And our next question is from the line of Deane Dray from RBC Capital Markets.

I'd like to stick with Accruent and Gordian, if we could. And could you remind us of their deferred revenue profiles and what the cash flow contribution, the free cash flow contribution, were this quarter?

And so Deane, I think if you're comparing to maybe some other companies about a big prepayment and getting a deferred revenue, that's really not how they're set up. And so I don't think that there's much there and especially moving the needle on free cash flow.

Just if you gave us a profile of what you expect even if it's not 100%, but what would the free cash flow profile or free cash flow yield for the businesses be?

I think it will be similar to what the rest of Fortive would be. I just -- I think that it's going to have great margins, but as the -- as that free cash flow percentage of earnings, I think you look at it around the 120% that the rest of the company is. I think that would be great. But when you get that deferred revenue, you can sometimes see it -- you jump off up beyond there.

Good. And then just still on these two, when you acquired them, you referenced some significant adjacencies for more M&A in this space and how you're feeling about that, and does it make sense to have them in the field solutions piece and might you be breaking these out at some point?

Yes, I wouldn't necessarily speculate on breaking it out at any point in time. I certainly think they're -- they fit the mandate of what less is trying to do within the platform at this point in time. Relative to M&A, yes, we have a solid funnel there. As you can imagine, both of them being private equity backed. They had a funnel already working. They -- Accruent had closed some deals right around the time we closed the deal, so they had already brought in a couple of businesses that they were working on. So yes, we like the funnel of both businesses, and we're continuing to look for both small and even larger opportunities where available to bring into the business. And both management teams have good experience in integrating acquisitions. So not only do we have -- obviously we have the capital to do this, but we've got the management capacity in both of those businesses to accelerate growth.

And our next question is from the line of Scott Graham from BMO Capital Markets.

I want to kind of asking this same question as Deane but maybe a little bit different way. Portfolios, the segment's a little bit lopsided right now. Could we be, a year from today, looking at a three segment portfolio? Does that seem to make more sense?

Well, I think that lopsided in terms of what we have on board, I'm not sure I agree with that. But I suspect your meaning when we get to the other side with ASP. I think once that we get that on board, we'll take a look and see what makes the most sense. It -- but right now, I think we're thinking about ASP coming on and it will become its own platform. And we'll wait to -- wait until we get to probably till the end of the year before we take up segments.

Okay. Fair enough. Then the follow-up is simply, again, not to beat the horse dead here, but 3% to 5% organic, just -- as I look at what's coming into the organic in '19, the 17 acquisitions and then we have some also faster growth acquisitions coming in late this year into the core, it seems like 3% organic would be something that you can do in your sleep. I'm just wondering what is the -- what gets you down to a 3% at the low end? What are the things that you're concerned about that you would put a plus 3% after, particularly if you remember also we talked about this at the Investor Day where GDP, GDP plus, I think that there was some thinking about possibly going to numbers and something a little bit higher than GDP. Can you just weigh in on the 3% in particular?

Well, look, Scott, we agree with you. We're really excited about the businesses that we brought on. The main thing is the Gordian, Accruent and ASP. They -- Gordian and Accruent return into that core number only in the fourth quarter really, and ASP won't turn -- won't be in it at all. So a big -- so I think when you get to 2020, I think a fair comment, but that's the main point.

But if you could maybe finish that, Chuck, if you don't mind, the 3%, what are the things out there that get you to the 3%? What would have to happen there?

I think -- Scott, it's Jim. I think it would really be two things. One, probably, a little bit slower in Western Europe, and maybe China not coming back in that. We called it mid-single digit. There's a range of numbers within mid-single digit. They're probably on the lower end of that mid-singles. Probably the two things that -- I think North America's solid. You never -- it's -- in February, I'm never going to call a year I found that, that's not necessarily a great thing to do with not having an economics degree, but I think the brutal reality is what you we should be doing. What -- we're doing what we need to be doing for a market environment that looks like low to mid-single-digit growth depending on the business. And I think if North America's good, Western Europe holds in there, China continues to be pretty good, the rest of the markets are relatively small, then you start to see the high end of that. And if any of those, I think North America's probably the most likely to stay pretty good and the other two weighing would be where you start to get into the lower end of that guide.

And our next question is from the line of Josh Pokrzywinski from Morgan Stanley.

Yes, just to keep on with 1Q, I know -- to go back to we are probably beating the horse pretty dead at this point, but just pulling out the price comment from earlier about the point of price in the first quarter, the comp gets easier, you mentioned GVR feels a little bit better. I guess, Jim, you made a comment about some pull forward maybe in China, is there anything else that got pulled forward elsewhere as best you can tell? Or anything kind of wonky in the backlog? Otherwise, you would think that having January behind you at this point, that the -- that it'd be easier to bridge that out?

Yes.

Yes, I think one is, we think we -- there's probably about 70 to 100 basis points of growth in the fourth quarter that probably is equated to probably was first quarter business. So if you look at our guide, you're -- part of that is probably 70 to 100 that happened. So part of our overage in Q4 is -- and it really comes down to a few things. One, certainly there was a -- there was some business at Gilbarco that -- where people looked at year-end money and decided to spend it and wanted to take those orders in revenue in the quarter. That's one place. EMC had customers that wanted to get content in business, and that went out as well. As we mentioned in the prepared remarks, they had their biggest quarter in the history of the company. And then some pull forward of some of the pricing actions that we've got around tariffs that happened at Fluke and Tek. And so those things combined equal to about 70 to 100. And so we go in with, I think, some optimism around North America and China based on how we finished, but we also know that some of what we saw was probably business that would have transacted in the first quarter.

Got it. And then just to stick with that same line of thought, is there anything on the margin side that we should think about in a 4Q to 1Q bridge? I know there's a lot of moving pieces with the deals and obviously with ASP if it closes in the quarter, that will move it around further still, but anything sequentially that adds on, drops off kind of beyond a volume input?

No, I think that's the main thing, difference there from Q4 to Q1, especially when you look at what normally happens between these quarters, it's a significant step down, but nothing that comes to mind that's abnormal.

And our next question is from the line of John Walsh from Crédit Suisse.

So a lot of ground covered, but wanted just to get a little more specific. Can you actually give us the ballpark of where EMV revenue ended for 2018 so we just know the jumping off base for that piece of the business?

Are you talking about the -- well, we're about 40% through the cycle, a little over 40% through the cycle as we sunset 2018. So that's about where we thought we'd be, maybe a little bit ahead. But we also see, as I mentioned before, that we think it extends out farther. So the remaining, call it 60%, we'll never go to 100%, so -- but the remaining percentage will probably be -- we said -- we've been saying, as you know, John, 85% roughly by the end of 2020. And we think that number's actually pushing out some of -- I don't want to get too specific because it's a little bit a false precision at this point, but we do think that not -- more than 4 or 5 points probably is at least pushing into 2021 at this point.

Okay. And then maybe just to get after the core growth question a little differently, as we think about Q1 and the full year, and I look at your kind of large buckets, whether it's field solutions, product utilization, sensing, right, transportation, you've already kind of talked about some ranges on where you think the core growth is. But are any of those main platforms negative or down in either Q1 or in the full year construct? Or is there growth across all those major platforms in both Q1 and for the full year?

All the platforms have growth, John. As we mentioned in the prepared remarks, the two places where individual businesses might be negative for a few quarters, one at telematics and the other, Qualitrol. So those individual businesses, Qualitrol sits in field solutions, telematics in Transportation Tech, but they're obviously not even close to the biggest businesses in those platforms. So the platforms will continue to grow, but those individual businesses are probably the businesses we're working the hardest to make sure we can turn them around, if you will.

And our next question is from the line of Andrew Obin from Bank of America.

Just on Professional Instrumentation, as I think about Pacific Scientific, Tektronix, a, how did the federal-related revenues do in the quarter? And any impact from shutdown on the ability to collect the book business in the first quarter?

Yes, interestingly enough, very little. We had the business booked. We were a little worried about EMC because they do have some resources that come in to approve the products before they ship, but the team did a great job in getting ahead of that. So we really had -- we had a little bit of impact at Gordian, but on balance, probably within the weeds of a company of our size and scale. So thus far, no direct impact. You might say maybe -- and I think it's too early to tell if there's any second or third derivative impact.

And our next question is from the line of Nigel Coe from Wolfe Research.

So I hate to really beat the horse to death 2 or 3 times here, but, Chuck, I'm really struggling what the 1Q math and I know a lot of folks out there are as well, so maybe we just explore that again. It seems to me that your organic and FX is basically worked the way outside the top line in 1Q. Could you tell us the expense of M&A roll forward from external and Gordian estimates during 1Q year-over-year? And my math has it -- the effect is down in the third quarter, so I'm really struggling to understand why your midpoint guidance is only $0.01 above the prior year. So maybe some help there, it would be good.

So one thing I think our tax rate is up in Q1, not down. You said our Q1 tax rate is down.

Q1. Okay.

Yes, our tax rate is going to be 17% in Q1, and I think it was around 15.3% and thereabouts in the prior year.

Okay, so nothing else? Nothing smaller? So okay, we'll take it off-line and go...

So I talked about the -- reiterating as long as we're beating dead horses. FX, $0.02 in the quarter. There's also headwinds, as I mentioned from tax. And we've got more shares this year, it's also given us a little bit of a headwind.

Okay, we'll go through this more off-line. And then on the PI margin, again, we've touched on this as well. I think, Jim, you talked about mix, some negative mix I think in PI. I think you're referring to PI. Am I to understand that just Fluke and Tektronix were very strong in the quarter? So was that negative mix in PI, is that a factor why marking the flow? And then how does that -- maybe then, Chuck, if you could just maybe quantify this more because I'm not roughly set up in the -- for February.

So I don't think there was a mixed impact in PI. I think we had -- there's two things going on in PI, that's -- there's -- tariff is primarily hits, not entirely, but the biggest places it hits is in Fluke and Tek. So that probably gives us 60 basis points of headwind on our OMX. And the warranty is about $6 million, and that's another 40 basis points. As for the company, but so it's a little bit probably 60 -- another 60 basis points on the warranty. So when you weigh those two, those are the two headwinds why we're flat on our OMX, otherwise we'd be at triple digits.

And Nigel, I think as we -- it might have been in the prepared remarks, we talked a little bit about mix, but that was overall. That was just a little bit more IT than PI. So that's what we're talking about there. So just a little bit of mix there. That's overall at Fortive. And as Chuck mentioned, the -- he obviously answered all the questions within Professional Instrumentation. So we actually feel pretty good about the margins in PI in the fourth quarter. I mean, obviously we don't love a one-time charge for our warranty issue. But at the end of the day, if you sort of pushed through that, that and combined with the work that the teams did to negate some pretty considerable tariffs, we think we did -- we're really pleased with where that ended up. And I think it put -- kind of put us in a good shape as we get through the year in 2019.

That's pretty helpful, Jim. So just to underline the point, Q1 PI, you think core margin's up in Q1?

Yes.

Yes.

And our next question is from the line of Joe Giordano from Cowen.

Just the M&A impact from acquisitions on PI really stepped up quite a bit from third quarter. I know you have more of the -- more time of Gordian and Accruent in there, but it was a little bit larger than what we're thinking. I'm just curious to see how you think about that bleeding off into '19 like on a cadence basis.

Are you talking about the step up around the amortization or the step up on the deal cost?

Not the transaction cost, the minus 375 for acquisitions, yes.

Okay.

On the revenue side, yes, I think, well, they clearly, we got full credit for both deals in the fourth quarter. So -- and so I think that number's probably -- obviously, it's going to end -- it will -- it's a -- it will go core at -- in the fourth quarter of next year. So we should see -- the fourth quarter's always seasonally big for those businesses. So there's -- I wouldn't necessarily multiply that number by four.

No, no, no, sorry, sorry. I mean, on the margin side, like the -- on the PI. On the operating margin, you had acquisitions minus 375 basis points. Just curious how that kind of...

Yes, they'll absolutely get better through the year. They're -- there's -- we had very little impact on the margins in the quarter given where we closed. And for sure, they will -- they'll continue to improve through the year.

Okay. And then a question on ASP. I mean, obviously, sterilization, a big thing out in hospital. So I'm curious how the trend towards like single-use, how like that -- does that have any impact on ASP? Or how does that -- the pull on that two kind of opposite trends?

It doesn't because of the products that are used, they typically -- there are products that are not necessarily not going to fall into the single-use category. We've been tracking some technologies where those might be opportunities. But I think when we look at the exposure that our technologies and our products and the products that we sterilize to single-use, there's very little impact. And still a lot of underpenetration around the world. So the U.S. and Europe, obviously, standards and regulations are fairly developed. But when you look around the world -- we were in China a few -- about 1.5 months ago visiting our ASP team, and clearly a lot of opportunity for unpenetrated market there in all forms of hospitals there. So I think it's unbalanced. Yes, some -- there's very little exposure to single-use. And certainly, when you look at the underpenetrated side of the market, lots of growth opportunities. Interestingly enough, I was with a number of the sales leaders, they're here this week. And we're -- we were with them as we roll out some of the Fortive Business System tools with them and stuff, and they're incredibly excited about the opportunity that's available to us. So I think across all fronts, as we get more and more into the business, Joe, we see a growth opportunity.

And at this time, I'm showing that we have no further questions. I'd like to turn the call back to Jim Lico for closing remarks.

Thanks, Ian, and thanks, everybody, for taking the time this evening. It's cold and snowy in Seattle. That's a pretty rare thing for us. But I think despite the weather, we are incredibly excited about what's ahead of us in 2019. We obviously had a very strong finish to the quarter with over 7% core growth, our best core growth quarter in the history of the company, 30% earnings growth. We think that's great, but it -- on the other hand, we know our best days are still yet to come given the great portfolio transformation work that we did in the year. So thanks for your support, and obviously, Griffin and team are available for questions and clarification tonight and through -- and tomorrow. Thanks, everybody. Have a great night.

Ladies and gentlemen, this does conclude the conference call. We thank you for your participation. You may now disconnect.