Fortive Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 25, 2023

There are 13 speakers on the call.

Operator

My name is Christa, and I'll be your conference facilitator this afternoon. At this time, I would like to welcome everyone to the Fortis Corporation Third Quarter 2023 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After speakers' remarks, there will be a question and answer session. I would now like to turn the call over to Ms.

Operator

Elena Rosman, Vice President of Investor Relations. Ms. Rosman, you may begin your conference.

Speaker 1

Thank you, Christa, and thank you everyone for joining us on today's call. With us today are Jim Leko, 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 Regulation G are available on the Investors section of our website at fortive.com. Our statements on period to period increases or decreases referred to year over year comparisons unless otherwise specified.

Speaker 1

During the call, we will make forward looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward looking statements are subject to a number of risks and actual results might differ materially from any forward looking statements that we make today. Information regarding these risk factors is available in our SEC filings, Including our annual report on Form 10 ks for the year ended December 31, 2022. 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.

Speaker 2

Thanks, Elena. Hello, everyone, and thank you for joining us. I'll begin on Slide 3. In the Q3, we continued to see the benefits of our portfolio strategy with core growth and margin expansion in all segments. Q3 core revenue growth was 2.5%, tempered by specific headwinds in healthcare and slowing in parts of sensing in China.

Speaker 2

Strong execution by our teams drove substantial improvement in gross and operating margins, earnings and free cash flow. Adjusted gross margins expanded by 160 basis points to 59.7%. Adjusted operating margins increased by 150 basis points 25.9 percent and adjusted earnings per share grew 8% and free cash flow increased 25% to $384,000,000 As you can see, our strategy is delivering results with enhanced portfolio positions, innovative new products and dedication to the Fortive Business System, allowing us to consistently perform despite a mixed macro environment. As we look ahead, our attractive funnel of bolt on and adjacent M and A opportunities across our 3 segments and 5 connected workflows are expected to drive upside in 2024 as exemplified by the acquisition of EA Electro Automatique as well as 3 other bolt ons in the quarter. Turning to slide 4.

Speaker 2

We wanted to highlight how the year is playing out relative to our initial expectations and begin to frame our thinking for 2024. Beginning on the left, hardware product orders were stronger in the first half of the year As traction on new product launches and leverage to secular drivers provided more backlog to buffer the normalization of supply chains. Hardware product orders were down mid single digit, which we believe reflects continued solid demand with orders up over 20% on a 3 year stack basis in the 3rd quarter. Point of sale trends in North America and Western Europe have remained healthy even as channels normalize, while we did see slowing specifically in China and parts of sensing in the quarter. Software and services continue to demonstrate their resilience with high single digit growth across our facilities and asset lifecycle, Environmental Health and Safety and Perioperative Customer Workflows.

Speaker 2

The healthcare environment continues to improve. Core growth in the 3rd quarter was constrained by the clearing of channel inventory in ASP and continued weakness in the bioprocessing market at Imtech. Turning to the right hand side of the slide, we are delivering 2023 performance ahead of our initial expectations coming into the year with mid single digit core growth with adjusted operating profit margin incrementals over 60%, delivering nearly 2x the margin expansion planned in the year. And we are accelerating our capital deployment in the quarter with robust free cash flow and ample firepower to fund attractive M and A opportunities. Further evidence that our strategy to create a more durable growth company is working is highlighted on slide 5.

Speaker 2

Our innovation and portfolio strategy Including automation and digitization, the energy transition and the need for productivity solutions contributing to our improved through cycle performance. We have several good examples across Fortive, including providing customer software solutions to digitize and automate processes and deliver customer success in AI driven ecosystems. Probation is partnering to enable real time AI in the GI workflow, contributing to their strong win rates and accelerated mid teens growth in 2023. And in the Q3, Fluke added AZIMA DLI, a bolt on acquisition accelerating their AI enabled predictive maintenance capabilities with vibration analytics and remote condition monitoring. Fortive is also helping to solve our customers' toughest energy transition challenges with breakthrough innovations.

Speaker 2

Fluke and Qualtril Are both benefiting from strong demand in solar, EV storage equipment and the build out and modernization of electric grid infrastructure. In addition, Fluke acquired Solmetric to further solidify their leadership position in the fast growing distributed energy market with high precision solar test and measurement products. In this environment, our customers are putting a premium on productivity. ASP is launching new sterilization monitoring products, Broadening their leading position in biological indicators, allowing customers to reprocess surgical instruments with greater speed and efficiency. Further, Gordian acquired NSR, a natural extension of their pre construction workflow, which provides cost data that will allow them to expand job order contracting in the U.

Speaker 2

K. Turning to Slide 6. We are pleased to announce our agreement to acquire EA Electro Automatique, enhancing our leading position in advanced electronic test and measurement solutions. EA specializes in the high power segment of the market that serves a number of growing end markets, Including data centers, energy storage, e mobility, grid modernization and hydrogen power alternatives. EA expands Tektronix' addressable market and complements and diversifies their offerings in the fastest growing areas of the power market, solving for power density and efficiency challenges and creating a more sustainable and electrified world.

Speaker 2

With an estimated $175,000,000 of revenue low 40s operating margins in 2023. EA is expected to be accretive to our growth and margins. Electronic's global scale, including a 10x increase in go to market resources accelerates EA's global market expansion. Further, the Fortive business system will be a valuable tool in achieving commercial, Manufacturing and Operational Synergies, creating unparalleled value for customers and shareholders. As a result, we are targeting an attractive double digit return profile in year 5, an earnings accretion that ramps as we delever given our robust free cash flow.

Speaker 2

In summary, the acquisition of EA reflects our commitment more durable and higher growth and ability to drive higher returns for Fortive for years to come. Turning to slide 7. Fortive Business System continues to be a differentiator for us, enabling our business to drive innovation and profitable growth. We recently completed our annual CEO, Kaizen Week. This event is a hallmark for demonstrating our culture of continuous improvement and our ability to deliver outstanding results in our operating companies in one powerful week.

Speaker 2

As always, we bring together our most senior Fortive leaders, including our segment leaders and many of our operating company presidents with a total of 41 teams and over 500 team members driving significant improvements in growth, margins, free cash flow and breakthrough innovations. Some Kaizen highlights include, at ISC and Qualyspro, their events realized 100% to 125% improvements in productivity. Service Channel reduced their time to onboard new customers and Provation had a 2x improvement in the conversion of marketing leads, Both enabling more and faster ARR growth. Tektronix deployed a copilot leveraging AI to bring technical expertise to customers and internal automation to significantly improve their efficiency and customer experience and Fluke Health Solutions had breakthrough results in dosimetry reporting, Reducing customer response time by more than 50%. In summary, this year's event continued to emphasize the power of the Fortive Business System and the breadth of applications across our portfolio driving sustained results.

Speaker 2

I will now provide more details on each of our three segments, Beginning with Intelligent Operating Solutions on slide 8. IOS grew core revenue by 4% with good growth in most regions. Margins continue to benefit from our portfolio evolution with high margin software growth as well as price realization and productivity benefits Driving 230 basis points of adjusted operating margin expansion. Highlights in the quarter included. Flukecore revenues were up low single digit A solid core demand and NPI traction buffered expected channel normalization.

Speaker 2

EMae continued its strong performance with another quarter of double digit revenue growth. Luke secured a number of wins in secular growth markets, including a sizable calibration order from an aerospace and defense customer. Luke also continues to see success with new product introductions with the recent launch of MechQ, a first to industry acoustic imager for diagnosing mechanical failures. EHS revenues grew mid single digit with double digit INET growth at ISC and another strong quarter for SaaS and Intellect with over 50% growth in ACV customer bookings in the quarter. In addition, Marathon Petroleum, our largest iNet and Safer Systems customer, recognized Industrial Scientific with their Corporate Exceptional Partnership award.

Speaker 2

Facility and asset lifecycle revenues grew high single digit driven by continued strength in SaaS. Fortive continues to drive market penetration as more customers utilize their job order contracting platform to procure and manage their large infrastructure projects. Accruent secured an agreement with Xavier University provided facility management software, which included cross selling with Gordian Service Channel launched several innovations for both subscriber and provider software releases contributing to strong overall growth. Turning now to slide 9. Precision Technologies reported 1% core revenue growth and adjusted operating margins of 26.5%, spanning 60 basis points, reflecting strong price realization and productivity benefits.

Speaker 2

Some highlights of the quarter include: Tektronix is executing on robust backlog in power and digital test and measurement solutions and delivering low single digit core growth and outstanding operating margin expansion. This included over 20% revenue growth in North America, reflecting continued customer investments to solve the proliferation of new power design challenges for batteries, EVs and industrial applications. Teck orders continue to normalize off of 40% 2 year stack at the end of 2022. Double digit order declines at Tech were greatest in China. However, we did see weekly patterns improve sequentially as we move through the quarter.

Speaker 2

Further, we expect continued lead time improvement and channel normalization with orders returning to growth in the coming months as customers continue to prioritize investments Semiconductor Advancements, AI Enabled Compute and Electrification of Everything. Sensing Technologies saw another quarter of strong orders and revenue growth at Qualitro. This included a meaningful deal in the quarter from a large U. S. Utility customer for full transformer asset monitoring solutions.

Speaker 2

Elsewhere in sensing, slowing in China was reflected in lower than expected orders and revenue. Lastly, Pacific Scientific EMC reported another quarter of double digit sales growth as it benefits from Kaizen activity to improve manufacturing capacity and operational execution to deliver on record backlog. Moving now to Slide 10 in Advanced Healthcare Solutions. Core revenues were up 2%, reflecting improved underlying sterilization demand, partially offset higher than expected U. S.

Speaker 2

Channel inventory in ASP. For the Q3, the total impact resulted in $11,000,000 in less revenue, impacting AHS core growth by over 300 basis points and adjusted operating margins by almost 200 basis points. Elsewhere, high growth markets saw revenues up high single digits driven by robust growth in Latin America as well as good growth in Asia. Adjusted operating profit margins increased by 200 basis points year over year. We are seeing traction on pricing actions as well as the benefits of the productivity initiatives reflected and higher margins.

Speaker 2

Additional highlights in the quarter include Sensus continued to grow its subscription revenue with its SensiTrax SaaS business increasing mid teens, benefiting from continued traction in both new logo expansion and cross selling opportunities as customers standardize on their leading instrument tracking software solution. BlueCalf Solutions revenue increased slightly as high single digit growth in its core dosimetry business was partially offset by project timing. We also saw continued market weakness in Imetec accounting for approximately half of the slower than expected growth in the segment in the 3rd quarter. Lastly, Probation had another quarter of excellent growth, over 20% driven by continued APAC SaaS adoption and new logo success. Previewing the Q4, the ASP channel transition is now complete and we expect growth to accelerate in EHS.

Speaker 2

This includes the initial ramp of ASP's Peace recently launched portfolio of steam sterilization monitoring products, which will further build over several quarters as they expand their global reach. We continue to expect margins to ramp in Q4 and 2024 driven by consumables growth, price realization and productivity actions. With that, I'll pass it over to Chuck, who will provide more color on our Q3 financials and our 2023 outlook starting on Slide 11.

Speaker 3

Thanks, Jim, and hello, everyone. We generated year over year core revenue growth 2.5%, which included a single digit growth in North America. As Jim mentioned, we saw a 20% growth in Tektronix and acceleration in our software and recurring revenue streams, Which more than offset moderation in some of the sensing businesses. Western Europe revenue was up slightly as growth in software was offset by normalizing growth in hardware products. Asia saw continued strength in India, up mid teens and Japan up high single digit, Which was more than offset by low double digit decline in China.

Speaker 3

We had anticipated growth in China would slow in second half as we lapped outside growth in prior years. For example, Tektronix was down over 20% in China in the quarter. Was still up 20% on a 2 year stack basis. We also saw continued slowing in sensing given the current macro environment. Well, AHS grew high single digit as electric procedure volumes improved in the quarter.

Speaker 3

Turning to Slide 12, We show operating performance highlights for the Q3. Adjusted gross margins increased 160 basis points to a record 59.7%. On a 2 year stack basis, they are up an impressive 2 40 basis points, driven by the benefits of our portfolio evolution, The continued application of FES initiatives and strong price realization. Adjusted operating margins expanded 150 basis points to 25.9 percent or 300 basis points over the last 2 years, reflecting higher gross margins and the benefits of the productivity initiatives we executed earlier this year. Adjusted earnings per share increased 8% to $0.85 Despite higher year over year interest and tax expense, earnings are up 30% on a 2 year stack basis And free cash flow was $384,000,000 reflecting a 25% increase over the prior year and over 50% growth the last 2 years as we continue to grow earnings and effectively manage working capital.

Speaker 3

Turning now to the guide on Slide 13 and the outlook for the remainder of the year. For the Q4, we are adjusting our range to reflect caution around the macro in China and delayed recovery in Invitaeq. By approximately 150 basis points and adjusted diluted earnings per share are expected to be in the range of $0.92 to $0.95 representing 5% to 8% growth and includes $5,000,000 of one time additional corporate expense related to the remediation plans following Cybersecurity incident in early October. We also plan to proactively fund an incremental $35,000,000 of productivity initiatives in Q4, which are excluded from our adjusted EPS outlook with accretive benefits expected in 2024. Finally, we expect free cash flow of $415,000,000 representing conversion of approximately 125% of adjusted net income.

Speaker 3

Turning to the full year recap. We are reiterating the midpoint of our earnings guidance for 2023, Which is coming in at the high end of the outlook we said at the beginning of the year. Things have largely played out as we expected with some upside driven by secular tailwinds driving market expansion, new customer innovations, resiliency of roughly 40% of recurring revenue, elevated backlogs and carryover pricing in our hardware products businesses offering moderating demand as order rates normalize throughout the year. As a result, we have core growth and margin expansion in each of our segments. Core growth for the year for Fortive is now expected to be approximately 5%, with adjusted profit margins anticipated to increase approximately 150 basis points.

Speaker 3

Adjusted diluted earnings per share is now expected in the range of $3.37 to $3.40 having raised our guidance twice in the year, and we continue to expect free cash flow of 1,250,000,000 representing a conversion of 105 percent of adjusted net income and 21% free cash flow margin. With that, I'll pass it back to Jim to provide some closing remarks.

Speaker 2

Thanks, Chuck. I'll start to wrap up on Slide 14. Consistent with 2023, we believe we will see sustained core growth and robust margin expansion and free cash flow growth in 2024, despite the evolving macro environment. What continues to differentiate Fortive is our ability to deliver mid single digit through cycle growth, reinforcing our portfolio durability and the power of FBS to deliver strong margin expansion. The consistency of our execution reflects The strength of our product vitality and alignment to high growth secular trends, continued solid customer demand and the buffer of excess backlog, adding to a resilient growth profile.

Speaker 2

In healthcare, we expect a continued modest pace of industry recovery to drive stronger growth and incremental margins as we lap discrete 2023 headwinds. Lastly, in software and other recurring, our efforts to increase demand generation and strengthen our go to market capabilities is expected to drive strong SaaS and license revenue growth in 2024. This brings me to slide 15 and how we drive differentiated performance and value creation for our shareholders. As we finalize 2023, we are demonstrating another year of strong execution, delivering record gross margins, operating margins and free cash flow. These sustained results underscore the power of the Fortive business system to relentlessly drive continuous improvement broader portfolio.

Speaker 2

As we showed at our Investor Day in May, by executing the Fortive formula, we expect to roughly double our earnings and generate more than $8,000,000,000 of free cash flow over the next 5 years. Our acceleration of capital deployment as demonstrated this quarter further positions Fortive as a higher growth cash flow compounder and a premier company delivering exceptional value to shareholders. With that, I'll turn it back to Elena.

Speaker 1

Thanks, Jim. That concludes our formal comments. Christa, we are now ready to take questions.

Operator

Your first question comes from the line of Julian Mitchell from Barclays. Please go ahead.

Speaker 2

Hi, good morning.

Speaker 4

Maybe just wanted to start with the Precision business. Just how the guidance sort of has moved around Tektronix.

Speaker 3

So it seemed

Speaker 4

like the test and measurement market was getting worse Few months ago, and you raised the Tektronix revenue guide for the year, and now it's come down. So maybe just help us understand, was it simply China suddenly getting very bad in late Q3 that caused such a revision? And maybe give us some context now with that PT segment being down organically in Q4, What sort of history tells us the duration of that sales downturn should be for the PT segment?

Speaker 2

Yes. Good morning, Julien. It's Jim. And I think when you look at it, you're right. When we look at Kind of where we're at now, we're back to where we were.

Speaker 2

And I think that at high single digit, I think for the year for Teck, I think we're really what we saw and you sort of answered it in the question is probably a little bit more of a step down in China. We obviously have good strength in China on a 2 year basis. I think in the 3rd quarter I think we're like 30% on a 2 year stack. But I think what we saw in China was a little bit of inventory, a little bit cautiousness on the part of a number of distributor and direct customers around all around China, not really necessarily industry based, maybe more broad based. I would call it more caution than anything.

Speaker 2

That's probably the single biggest aspect to it. We did have some push outs a little bit from a couple of large orders that we saw as well. But I would say the big Pareto bar on that conversation related to tech It's really what, it's really China. The good news on it and what we've seen as you know over the last several quarters With PMIs where they've been and semiconductor index down, number of factors that would suggest that some that were coming in we were coming into what we've been normalization. I think we've been consistent in that regard.

Speaker 2

We'll see tech get a little bit better in orders in the 4th quarter than they were in the 3rd. And our 90 day funnels actually look better now than they have been. So I think point of sale in a number of places, North America and Europe as an example, We're good and we'll probably continue to be pretty good. We actually China POS was actually decent in Q3 as well. So if I were just say stay high centered on tech, I'd say Hi, ParetoBars China.

Speaker 2

Trend, 3rd quarter probably the low point in many respects. We'll start to get a little bit better as we get towards the end of the year.

Speaker 4

Thanks. And then any broad thoughts on sort of PT overall? You've got down organic sales this quarter. How quickly are you assuming that flips positive?

Speaker 2

Yes. I think what we've been talking about strategically around PT has been We thought we've done a lot of work in TAC to try to move that growth rate, make it less cyclical. Our service business, as an example, in the Q3 was up 3%, which is I think a good environment relative to sort of stabilizing the business a little bit. We haven't done as much work in sensing. We've called that a low single digit business.

Speaker 2

And as We've had double digit growth there here for a couple of years. So we anticipated that normalization there. I think what we've seen over the last Sort of 60 to 90 days is what I would call more slowing. And so the PT number really in Q4 is really around sensing. Some of that's China, some of that's some direct OEMs that have sort of pushed out blanket orders into 24.

Speaker 2

Typically, Some of that is our lead times coming down. Some of that I think is a little bit of slowness. We talked about it on the Q2 call, Automation principally in Europe that continues HVAC, U. S. And Europe also a little slower and then as I mentioned China.

Speaker 2

So That really is the PT story in the Q4 relative to kind of the change in the guide.

Speaker 4

Thanks a lot. And then just one very quick follow-up. Healthcare, it's been a sort of a litany of issues for a few years. Once we get through the channel transition, which it sounds like that's finished, do we get back to sort of mid single digit plus growth in 2024? Is that the sort of natural Titlement as you see it without any one time negatives.

Speaker 2

Yes. I mean, we'll get out of guiding for 24, But I do think we'll see mid single digit for sure. Maybe just to sort of characterize what we saw from an ASP perspective. Obviously, this channel transition, We called out about $10,000,000 it was about $6,000,000 more than we anticipated in the Q3. And some of it is really why we got the strategy to go direct.

Speaker 2

It was really about The lack of visibility we really had on natural demand. When we take out those sort of adjustments for channel inventory in the second and the third, What we see is on a 2 year stack, mid single digit growth in the second, 3rd and 4th. So we really see more consistency. Obviously, some noise there, We would prefer not to have as well. But I think where we stand into the Q4, the channel situation behind us, we feel good about that.

Speaker 2

We feel good about the work the team has done. Obviously, a little bit more we're not proud of a little bit more noise than anticipated. We'll certainly take that. But where we stand today, I think is in a much better position strategically, should set us up well for 2024. Quite frankly, when you see the margin expansion in Health in the third, 200 basis points, we've talked about that margin continued improvement.

Speaker 2

I think even on a little bit less revenue, we had good margin expansion. So really when you look at it, it's kind of a good walk into Q4 and certainly sets us up for what we think will be a much better 24.

Speaker 4

Great. Thanks so much.

Speaker 2

Thank you, Jillian.

Operator

Your next question comes from the line of Steve Tusa from JPMorgan. Please go ahead.

Speaker 5

Hi, Steve.

Speaker 6

Hi, guys. How's it going?

Speaker 2

Great.

Speaker 6

So just on the hardware backlog

Speaker 7

you guys have about in

Speaker 2

the past, where do we stand on all that, the

Speaker 6

one that was like 350 at one point, what's the status of the hardware backlog?

Speaker 2

Yes. I think you tried to take us up last quarter from 3.30 to 3.50, but I think Steve has come down. I think that's a fair statement. We sort of said we might end the year in the 200 range ish. We thought and that's what I said in the Q2.

Speaker 2

We think that's maybe more between 100 and 150 ish, depends on how the order rate. Some of that is just blanket orders that pushed into 24. So it doesn't necessarily mean As dramatic as that number, but we'll still walk into with the excess backlog of over $100,000,000 So Not as much as we anticipated, and that's principally in sensing, a little bit of attack really in China, related to China, the conversation I just had around the Answers to Julian's questions, but I think where we stand today is still with $100,000,000 plus of backlog that doesn't include EMC, Which obviously has a very, very high backlog. So I think, still have an insurance policy going into 'twenty four.

Speaker 6

And then, what happened at Invitec? Can you just maybe discuss a little more of the drivers of that business Board. Yes.

Speaker 2

We that business is really mostly high centered on design, engineering and manufacturing for the diagnostic and bioprocessing market. Certainly, you've heard over the certainly the last couple of days how that's taken a step down to some extent. We thought we we thought our guide I would own this one. We thought the second half guide was sort of bottom for us. And I think as it turned out, it was not bad and a little bit more.

Speaker 2

We think now we've taken that down to where we think that is. But certainly, we were we're certainly a little bit overzealous. It's not our core healthcare market. As you know, the core healthcare market really centered around hospitals. But I think where it stands today, the engineering resources, we've certainly seen some customers sort of push projects into 2024.

Speaker 2

That's what the guide

Speaker 6

One last one for you. Does this feel recessionary to you? And are you guys do you have a playbook for costs,

Speaker 7

If so.

Speaker 2

Yes. I mean, I think Steve, thanks for the question, because I think at the end of the day, it really I don't know yet if this is in full. I think 4 quarters of PMI being where it's been and a number of other indexes around industrial production and some of those things Having been slow, I think we've seen pockets of that and that's been reflected in some of the order rates that we've described over the last couple of quarters. But I think if we come Back to the original guide of the year, we're on that number. We prepared for slowing in some places.

Speaker 2

That's why margin expansion was so good in the second in the Q3, following on a little bit less revenue. As we said in the prepared remarks, we've upped our productivity view of a little bit. And again, maybe a little bit of abundance of caution, but to be prepared for any environment. And And we still think next year could be good. I think as we said a number of the things that have played out in the strategy, software was really good in the quarter.

Speaker 2

It continues to be strong. Our services businesses continue to be good. You saw Fluke in better shape, I think, than maybe if we were in a recession and their point of sale is pretty good. So I wouldn't call it necessarily yet, but I think there's pockets of things and we'll be prepared for.

Speaker 6

Great. Thanks a lot.

Speaker 2

Thank you, Steve.

Operator

Your next question comes from the line of Jeff Sprague from Vertical Research Partners. Please go ahead.

Speaker 8

Hey, Jonathan. Thank you. Hey, hello, everyone. Hey, can we just kind of maybe come back to Tech First, so orders are down in the quarter, but you're expecting them to inflect positively in Q4. Just maybe elaborate on what's driving that?

Speaker 8

Or is that just the comps now moving the other way? Like what kind of visibility do you have on improving orders at Tek?

Speaker 2

Yes, it's a couple of things. I think number 1 is, We've seen slowing in tech orders for a few quarters now. And so some of it is comp. You're right. We started to see some slowing.

Speaker 2

The 2 3 year stacks are still really strong. So we're working off a level of order just raw order dollar numbers that are still very, very good, Quite frankly, unprecedented in the history of the company over the last few years. So in that sense, it really there is much of a comp issue. We started to slow in the Q4 of last year. So, yes, that's it.

Speaker 2

And then there's a little bit of we think, you know, China maybe gets a slight, slightly better. It was pretty dramatic in the quarter, but we Even in we've seen some early signs that maybe that gets a little bit better. I wouldn't call it good. I'd just call it a little bit better. So, we had some order push from Q3 to Q4.

Speaker 2

We think we'll see those things as well. So, the majority of it is comp. We're not counting on a big step up improvement. And, but we are seeing some things that might suggest things might be a little bit better and that's reflected And how we're talking about it.

Speaker 8

And on this inventory realignment in ASP, so you misjudged it a bit in Q3. 3, like what is your kind of visibility that you totally understand what's in the channel and We don't have some additional hangover into Q4 or maybe there's some hangover baked into your Q4 numbers still.

Speaker 3

Hey, Jeff. This is Chuck. No, we don't have anything baked into Q4. We're done shipping to the distributors. And if there's some We're confident that we've worked through everything.

Speaker 3

It was bigger than we had visibility to, which as Jim mentioned a few minutes ago, is why we wanted to make this One of the reasons we want to make this change, we wish we'd been able to size it properly out of the gate, but Yes, that's why we make the change, but nothing in Q4. And so we what we are going to see is ASP Should be in mid single digit in Q4.

Speaker 8

And maybe just a quick one, this cyber issue, is this Totally wrestled to the ground or we do we have some kind of open ended issue we're dealing with there?

Speaker 2

Yes. We experienced the network Structure disruption from what we're calling a cyber incident in the quarter. We talked about some costs to mitigate that roughly a penny Around $5,000,000 that's in the guide, that's what we called out. We did have some downtime in some North American facilities. Those are back up and running.

Speaker 2

We definitely think we can mitigate that. We've mitigated the issues relative and we first contained the issues. We've mitigated them. We've completed the investigation. We're implementing the final remediation measures.

Speaker 2

So we don't believe this incident has a material impact on the quarter. So That's where we stand, right? Yes, that's where we stand.

Speaker 8

Great. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Deane Dray from RBC Capital Markets. Please go ahead.

Speaker 3

Thank you. Hi, everyone. Can we start with the EA acquisition? One of the things that struck me in the release is you Talked about how you want to leverage the Tektronix franchise. And maybe just kind of elaborate on that.

Speaker 3

Is it distribution? Looking at their products, there's a lot of kind of similarities in terms of bench top, but it doesn't seem to me there's a lot of product application overlap and maybe I'm wrong there. So How does the leveraging the tech franchise play out here?

Speaker 2

Yes, there's not a lot of product overlap, Dean, you're right, but there is a bunch of application overlap. We've talked about the power market at Teck for a number of and how that's really been driving growth. Even in the quarters we were just describing, we continue to see strength and that's really been on the backs of our mainstream oscilloscopes and probes And our Keithley source measuring units. And almost in every one of those applications is also An EA type product, if you will. So we will 10x their go to market.

Speaker 2

They were mostly direct in Germany and parts of Europe, Mostly with distributions in countries around the world. We'll 10x that with our own go to market From a capability both direct and channel capability, we think that's a tremendous leverage point. It is at the call point we're at And we see a lot of those applications relative to seeing EA right there in many cases or In many cases, seeing others and understanding that we can be a partner to EA in that regard relative to the go to market. So we feel good about the synergies. It's obviously a very good business.

Speaker 2

It's had very strong growth. It's got software like growth and software like margins. And we think we can really help accelerate the continued market expansion of the product lines.

Speaker 5

Great. That's good to hear.

Speaker 3

And then just as a follow-up and some of the themes about what are you seeing that might be recessionary or not, Two areas I'd be interested in hearing, the typical fluke sell in versus sell through, how that is The cadence there and then broadly the cadence for the quarter. If you broke out revenue growth or orders, How did it play out in the quarter by month? And did you exit in a more deteriorating fashion or not?

Speaker 2

Yes. I mean, I think when we look at Fluke POS as an example, North America is probably the best place to think about the U. S. Economy. It played off pretty consistently.

Speaker 2

Although, order point of sale came in pretty consistently, we got to look at 2 year stacks Because as we fulfill backlog over the last 12 to 18 months, it does in some respects distorted a little bit. But by and large, pretty consistent. I think when we looked at China, it was probably a little slower as we got as we went through.

Speaker 3

But I think we have a

Speaker 2

good understanding of where that was and that kind of thing. And that's broadly China, not just Fluke. So I would say that's how I anticipated. Teck, on the other hand, was their order growth was actually better in September than it was through the early part of the quarter. I would say though we did see a little bit later in the month.

Speaker 2

And so there was maybe a little bit of a dynamic where In a few places, but I think that's really what the biggest change in really how we think about the second half though is really coming back to Les, maybe really specific OEM customers within sensing in those markets I described and China. I think those are the 2 big changes that we really saw. Great. Thank you. Thank you.

Operator

Your next question comes from the line of Andrew Obin from Bank of America. Please go ahead.

Speaker 9

Hi, guys. Good morning. Good morning. Hey, how are you? Yes, just I guess a question on PT and The decision to sort of buy EA.

Speaker 9

I think for years and we love tech, but It was like one of the acquisitions back at Danahertz. This is the one that didn't go well. And there were questions and all of a sudden there's a lot of Attention being paced to it, right, press reported Natty, clearly you're making a bet here with EA. Can you just talk about the evolution of the company's thinking about sort of tech and how you're thinking about the business overall Where this is all of a sudden a key area for capital deployment and what it is you're seeing 2, 3 years down the road that gets you excited?

Speaker 2

Yes. Thanks, Andrew. I would say number 1, when you look at the returns of tech from back a while ago, those returns are good now. Yes, we had a little bit of challenge in the early days, that's exactly right. But that's a little bit of old tape.

Speaker 2

The returns now are good. And I think we feel good about the business and I think the performance in the business over the last several years And the profitability that's come with that has been very good because of the strategy of getting out of some businesses That were much more volatile, the video business being one of them, but a few others, getting into more services, which give us the higher attach rate and less volatility. And you've seen that play out over the last couple of years. I think as a large business within the company, We've been very specific and we think we've been very deliberate in terms of our narrative that the power market was a very good market for us that had good trajectories relative to secular drivers around electrification. That's not just EVs.

Speaker 2

Sometimes people think of that as mobility. That's much more around storage. It's much more around the use of renewable energy and the challenges that that brings to the grid, the challenge it brings to data centers, the challenge it brings on storage. And we've got an exceptional we've had exceptional success in those markets over the last few years. We talk about that relative to Our own success as the mainstream oscilloscope line in that platform and the success that that's had.

Speaker 2

So a natural extension of that is what we see at EA And that's an opportunity for us to have a high value bolt on. It accretes immediately to Tektronix' growth rate and profitability. And I think investors hopefully will I think and we've had good it's interesting, I've had industry people That I've known for decades tell me over the last 48 hours what a great deal that is. We obviously got to continue to talk to folks about it to help them understand the company. But I think when you see it for what it is financially and what it is strategically and the fact that we can get the kind of returns that we've described, I think it's a very good addition to Teck and we're excited about it.

Speaker 2

And we're excited about not only what it happens in 2024, Quite frankly, what it really brings to the business and we've talked a little bit about this, but as we highlighted our 20 28 targets for EPS and free cash flow. EA gets us about 30% to 35% about 40% actually of the M and A EPS target. So when you look at that at a multiple that we were trading at today, so We feel really good about the deal and we feel good about the opportunity to really to bring that team on. It's an outstanding team and we think it will be a great addition to Tektronix and the PT.

Speaker 9

And just to follow-up on just software, but specific, I guess, facility and asset lifecycle, Right. We sort of slowed down to high single digit growth. And I apologize if I missed it, but what were the key Headwinds that sort of took it down from double digits to high single digits and how much visibility do we have on this business reaccelerating into year end and into 2024? Thank you.

Speaker 2

Yes. I think Pfau is in great shape. We, it's a great story relative to iOS margin expansion that we had. You've obviously had a We've had a great year to date in iOS margin expansion and Pfau is a great part of that story. We had a little, I would call it a little bit of slowing at Gordian, but That is really not slowing.

Speaker 2

It's just really we had an exceptional first half. And so it's a little bit of moderation more than anything, but I wouldn't read anything in That business has never been as good a shape as it is right now. So I think at the end of the day, we service channels on a great trajectory. We talked about a number of the good things that are going on in Accruent. I wouldn't read anything into file other than we feel really good about it.

Speaker 2

It's, we're in a good place. It's going to be a good setup for 2024. The business is really humming along.

Speaker 9

So 10% -plus is still a good placeholder for this business long term?

Speaker 2

Yes, I think we've said hot sort of high single to double and it might move around a little bit. You do have a little bit of non recurring service business in A little bit that plays out every once in a while. You get a little bit on the comps. But yes, I mean, it's going to be that way in the 9%, 10%, 11% kind of percent. Probably, You can dial that in for strong success in the years to come.

Speaker 9

Thanks so much.

Operator

Your next question comes from the line of Scott Davis from Melius Research. Please go ahead.

Speaker 7

Good morning, I should say, everybody, Jim, Chuck and Elena.

Speaker 2

Good morning.

Speaker 7

Can you guys hear? Okay, good. I got disconnected a little earlier. So if someone asked this question, I apologize. But Can you clarify on this channel adjustment going direct?

Speaker 7

Is there a margin payback? I would imagine you capture some of that margin that distributors were getting. But are we going to see that in the numbers? Or did you have to add costs Proportionally to that change.

Speaker 3

Scott, this is Chuck. Yes, there's a margin Component to that is about 7% on the revenue that was going through the North America distributor. And you will start to see that Show up in price in Q4.

Speaker 7

Okay, good. And when you guys think about kind of Your pricing strategy and I imagine it's dynamic by SKU. But Is this new world we live in, one where you can go out every January 1, you think with some sort of placeholder price increase and capture it in the marketplace or is that not how to think about it?

Speaker 2

No, I think Whether it's we probably have several dates. If I were to think about the hardware businesses, which have obviously had unprecedented price over the last few years, But we will continue to have good price. We always we think about it as value capture more so than price. We think about Our innovation capability and if we can bring on higher innovation, ultimately we'll be rewarded for that from a gross margin perspective. I think our gross margin trajectory over the last few years is really is not only a good testament to FBS, but it's also a good testament to innovation and our ability to launch products that have tremendous value.

Speaker 2

So I think the pricing environment is going to be better going in 2024 than normal, But I would say I wouldn't say it's better than 23, I would just say it's better than normal. And we would anticipate continuing to look for those pricing opportunities. You'll see that a little bit on the software side and built into net dollar retention. And then our pricing metric that we often talk about It's really more related to the hardware businesses. But as Chuck mentioned, we'll get a little bit more price in healthcare.

Speaker 2

We've been getting more price in healthcare over the last few quarters. We think that will continue as well into 2024. So a number of things that will be that we feel optimistic about. We're not in a guide Scenario just yet for 2024, but we are optimistic we can continue to get price.

Speaker 7

Super helpful. Best of luck for the rest of the year guys.

Speaker 2

Yes. Thanks, Scott.

Operator

Your next question comes from the line of Nigel Coe from Wolfe Research. Please go ahead.

Speaker 5

Hi, thanks guys. Good morning. So just look on this 4Q, just mathematics here, look, obviously a penny on corporate with fiber. Seems like maybe a $0.01 or $0.02 on FX. Just maybe just confirm that that move in FX about $0.01 or $0.02 on 4Q.

Speaker 5

But I'm just curious on Texas Instruments. There's obviously pretty weak forward guidance from them. And I think we're trying to all figure out whether this is Deterioration in short cycle demand, or whether consumers of chips like yourselves, are just destocking. You've been obviously holding buffer inventory and destocking. So any perspective you have on that, Jim, would be helpful.

Speaker 3

Nigel, why don't I take the first I think there is a little bit, I wouldn't say $0.02 impact on FX in the Q4. I think it's probably a little less than $1,000,000 But there is some FX, Just to close that one off. And you did note there is a penny in corporate cost for the remediation or efforts on the side.

Speaker 2

Hey, Nigel, a little bit I think I caught your question on TI and a little bit about inventory in the channel and things like that. I didn't tear apart their everything they said, but I did read a little bit about it. I would just say from a Tektronix perspective, broadly around Maybe components and kind of the market, if you will. I think the biggest place we saw some level of inventory correction was in China. We do track inventory levels embedded in our guide is some lowering of inventory in China over the next couple of quarters.

Speaker 2

We are I wouldn't say we're at elevated inventory levels as demand comes down a little bit, lead times come down. We are managing with individual channel partners relative to inventory. But I think in general, we feel like we're in a pretty good place With the guide of where that all sets up. Obviously, the biggest decision in that is really where the demand goes. And, but we think we've dialed in the kind of demand.

Speaker 2

The order projections that I was describing earlier in the call really embedded number of those things into Those complex regional complexities into how we're talking about Tektronix. So if that's the answer, let me know. But if I

Speaker 3

missed it, let me know.

Speaker 5

No, no, no. I'm just curious if you were like taking down ship inventories in particular, but

Speaker 2

I was just taking down our inventories. Yes. Yes. Okay. The one thing about us and you know this because our working capital performance has been so good, We really didn't build a lot of inventory into the company.

Speaker 2

We certainly will be taking actions on inventory Given our revenue guide for the Q4 is a little different than it was. So we're certainly working on that. But in terms of having big inventories on our own, We haven't necessarily been building big inventories. That's the benefit of lean manufacturing, quite frankly. Sorry, I missed that earlier.

Speaker 2

No,

Speaker 5

that's right. Yes. And then my follow-up question, I think this is a quick one. Yes, I thought Slide 14 With a good slide showing the variability in revenue growth, but ultimately around the mid single digit type of growth rate And 2024 is sort of a coupling to that. So I'm just curious, does the same thing as we frame 2024, does the same apply to incremental margins?

Speaker 5

And the spirit of the question is we're coming off a really big year for incremental, so I think we're north of 60%. Does that mean that 2024 might be sort of below Natural levels or you confident you can build on 23 margins in a 40%, 50% range perhaps?

Speaker 3

Nigel, a couple of things to think about as 2023 margins are very good. And normally, we think about 40% incrementals and I think It's been 60%. That has to do with more with the productivity things that we did early in the year and then you saw us do some more. So, no, we would always expect 40% incrementals moving forward. And then it will be a little bit more elevated because of the actions that we're taking right now.

Speaker 3

So we will build on what we've done here and we would expect them to be elevated from what they would be because of the actions that we're taking here in the

Speaker 2

And Nigel, relative to core growth, I think hopefully that slide is helpful because what we were trying to articulate is, what we really said is mid single digit through the cycle. So after a couple of years of 10% like growth, we would anticipate having a little bit of normal we've been talking about for 3 quarters. We have a little bit of normalization. We talked about that consistently about that in the second half of the year. We're seeing that Mostly very, very consistent with what we talked about.

Speaker 2

I think a little bit of difference in sensing, a little bit of difference in China relative to what we talked about. But again, I think We're seeing that normalization here in the second half of the year. And I think that that's very consistent with how we would look at a mid single digit grower through the cycle. And as Chuck just mentioned, the fact that we've been prepared for things means we've been able to drive really good margin expansion Even with some slowing in the second half of the year because of our preparation and because of how we run the business.

Speaker 5

That's great. Thank you.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Andy Kaplowitz from Citigroup. Please go ahead.

Speaker 10

Good morning, everyone.

Speaker 2

Hey, Andy.

Speaker 10

So I think one of the keys for ASP as you go into Q4 20 3 and 2024 is consumables coming back and being relatively strong. I think you've talked about underlying elective procedures improving. I would surmise that's the case in The U. S. And I guess in China at this point, but what is your visibility into the consumables ramp up and if anything would stop ASP from recording the stronger Consumables Demand.

Speaker 3

So Andy, a couple of things. Just from electric procedures, Generally, in Q2, we thought we were at 95% around the world. A little bit slowed in China because of the anti corruption probably to 90%, but definitely improving around the world. We do have this inventory adjustment transition in North America. But when you look through that, the actual consumables growth is already there.

Speaker 3

It's there in Q2 and Q3 3, when you understand how the customers are using our products. And that's where when Jim talks about the 2 year stack, we're up 8%, 9% from Q2, Q3, Q4 rather consistently, when you just take that one thing out. So we think we're already seeing that And what's actually getting used at the hospitals. Let me stop there and see if that made sense.

Speaker 10

Yes. No, that totally makes sense, Chuck. Thanks. And then Maybe just shifting gears, Jim, could you talk a little bit more how you're thinking about M and A now? After the announcement of VA and you had the 3 small bolt ons, How are you balancing thinking about the higher rates environment in terms of your own M and A strategy?

Speaker 10

And should we expect a higher tempo of M and A from Fortive over the short to medium term?

Speaker 2

Well, I think, Andy, it's really when we were in our when we had our Investor Day in May, What we tried to outline was the opportunities in front of us. And what I think what I tried to really try to communicate then and consistently is really around the fact that We were active that we I think I said in the Q2 call, I thought we'd get some things done in the second half. But maybe I had I probably had 4 of the 5 cards already drawn at that point. But, I think we've been busy. We've been active.

Speaker 2

We've been looking for unique situations. I think everybody was looking for a step down in massive price differences. We've seen a number of peer companies pay robust prices. I think what we've been able to do is find those unique situations. Those three bolt ons were Unique situations, places like Azimah, where we've had a long term relationship with them and a little bit of a partnership, Solmetric, which is a tool Soft Solar Tool Company.

Speaker 2

These are unique things that we're able to do that are really product extensions with high ROICs. And as I was mentioning earlier in the call, EA is really very similar. It's a business we've known for a while. We've known it in the market. They actually are well known amongst all test and measurement players for their technology and their ability to sort of play in The really good high growth applications.

Speaker 2

And so I think we'll continue to look for those opportunities that are there And we think they are. We'll continue to do that. But we'll also do that within the context of looking for strong returns. And that's what you'll see. And I think what makes us I think what we've been trying to talk about is that we would demonstrate these things.

Speaker 2

They're hard to plan out. So sometimes they come in bunches like they didn't this quarter. But we will remain active, but we'll be looking for those opportunities that are, I think, very similar to what we've seen this quarter, which is Unique situations where we really have an opportunity to get high returns.

Speaker 10

That's great. Jim, Chuck, just to sort of follow-up on my first You don't need a consumables ramp up to make your Q4 margin, right? You already have it. It's just the other thing getting better?

Speaker 3

Yes, that's exactly right.

Speaker 10

Got it. Thanks guys.

Speaker 2

Thanks Andy.

Operator

Your next question comes from the line of Joe Giordano from TD Cowen. Please go ahead.

Speaker 11

Hey, guys. Thanks for taking my questions here. Hey, Joe. I want to start on AHS. Like if I look back, right, like going back to 2018, the average growth It's something like high 2% range and this year is going to be kind of maybe a little bit below that.

Speaker 11

So I know there's a lot of different things and you're certainly not the only people to get Kind of surprised by what's going on in healthcare now. I mean that's pretty much everybody. But like what makes us really confident modeling forward that the entitlement is like Mid single digit plus one that's really only happened one time since 2018 despite portfolio changes there.

Speaker 2

Well, I think it's embedded in what the comment Chuck just had about consumables is number 1. Obviously, a little bit of noise, but We had COVID for several years and that certainly created a lot of noise given the fact that it was a regional situation. We were kind of Behind in the U. S. For a while and then China and all that, I won't reiterate all that, you know it.

Speaker 2

I think where we stand today and what Chuck just described is As you sort of look through kind of these one time channels situation, which we really believe was the right thing to do strategically, We're seeing that growth now. And I think the 200 basis points of margin expansion in the Q3 in the segment Really speaks to the fact that ASP's margins are starting to get up better, because the rest of the margins in the segment are very strong. So, We feel good about the launch point relative to how we've just described it. And 2024, as I said earlier in the year, 'twenty three, the healthcare market would be a little bit better. It wouldn't be great, but it would be better and 'twenty four would be better than 'twenty three and 25 wouldn't be better than 24.

Speaker 2

So we continue to think that we continue to see that. So that's what gives us The confidence and again, I understand given the fact that this inventory situation in the Q3 was a little bit more than we anticipated. But and so obviously that puts some skepticism in the nature of the question. But I think as we stand here today With what we've got going, we saw good equipment growth, high growth market growth in the quarter was 10%. I think we've got other parts of the world in better shape, and now we've got to we've needed to get North America in a better shape.

Speaker 2

That's really been the drag on the business in the last few years. And we feel that we needed to do the channel change in order to make that happen. And that's now behind us and we walk into the Q4 and into 2024 with a number of those things behind

Speaker 11

Fair enough. And then just last for me on the hardware backlog that you talked about. I think you said like what it was 350 or so last quarter, probably ending around 150 ish Give or take at the end of the year. So I guess rough numbers, we're talking like orders under revenue by like $100,000,000 a quarter right now and then we exit the year It's a pretty small percentage of like the total business there. So like we need to see when does dollars have to like dollars of orders rather than percentage of orders After starting selecting before like the revenue catches down to the orders.

Speaker 2

Yes. A couple of things. Number 1 is just remember we created about We've created $300,000,000 over $330,000,000 is an excess backlog number, not a backlog number. So in a couple of years, we created 3.30 just to and we said we'd end the we naturally deplete under normal circumstances, We would deplete backlog in the second half of the year. That's pretty natural.

Speaker 2

We had said that was likely to get us from 330 to 200. We now think that's about 125 ish, call it 100 to 150 maybe because I don't think we can be super precise here. And so it's called out about somewhere in the neighborhood of 50 to 100 difference. We think some of that already got pushed into 2024 And some of it probably is inventory corrections mostly in China. And it's really the sensing story that I talked about earlier in the call.

Speaker 2

So Hopefully, I've reconciled a little bit of that for you from a numbers perspective.

Speaker 11

It does. Thank

Speaker 2

you. Thank you.

Operator

Your next question comes from the line of Joe O'Dea from Wells Fargo. Please go ahead.

Speaker 12

Hi. Thanks for taking my questions. Hey, Jeff. I wanted to start on the just kind of inventory rationalization. And could you explain a little More kind of the differences between Fluke versus Tech and Sensing.

Speaker 12

And so what I think you're seeing it in Fluke as well, but it seems like you're seeing it in ways which it isn't surprising. And so whether that's A function of there were longer lead times in tech and sensing that led to more forward buying, whether that's more tied to the end market They're serving. Just trying to understand why they might be marching down a little bit of different paths in terms of managing through some of the destock effect.

Speaker 2

Yes. Joe, are you talking about inventory or backlog?

Speaker 12

I'm talking about inventory.

Speaker 2

Okay. Well, I don't think we had a big inventory correction here. If I might have miscommunicated that, but I think what we're really saying, the backlog answer I just had Really the story relative to our order rate. And I would say most of that in sensing is not really inventory as much as it is. It could be inventory, but It really is much more OEMs really pushing out.

Speaker 2

I think it's much more of a demand issue than in excess in specific verticals. The majority of that backlog reduction, which you could think of that as the order kind of orders changing is really in 3 specific verticals as we talked about. One being in sort of into automation, industrial automation, mostly with Europe OEMs, semiconductor, really 2 equipment companies that We supply HVAC kind of on a global basis in China and a little bit of medical with some specific customers. So that's really the big change in our back our excess back clock number that I was just suggesting to Joe and that's really mostly at sensing. Little bit of tech, a little bit of fluke, but not but really A big story.

Speaker 2

And relative to inventory in channels, what I was trying to suggest is, yes, a Little bit attack relative to China, but in North America and Europe, we still had pretty good POS. And I would anticipate that if demand is Really normalizing a little bit more. So if we continue to see that, we'll see some normal changes in inventory as lead times come down, but nothing we don't anticipate at this point anything dramatic.

Speaker 12

That's helpful. And then, wanted to ask on EA and just how to think about the revenue growth Potential and incrementals there over the next kind of 5 years, what you're thinking about to get to that kind of ROIC target. I mean, it seems like we're looking at maybe solid double digit revenue growth and some really strong incrementals and the 10x go to market is pretty compelling. But Maybe any details there in terms of kind of what you see for that revenue growth over the next number of years?

Speaker 3

Yes. Joe, we think it's going to be low double digit over the next 5 years. Really strong incrementals here like We've got some other examples of that, about 60% fall through. That gets us, I think, we talked about or Jim mentioned earlier, With 20% of our next 5 year free cash flow, we're going to get $0.40 of EPS out in 20.28. That's the math that we've given out.

Speaker 2

And I would just add, that's obviously a lower growth rate than they've anticipated. We think there's upside opportunity As well given the synergy and the go to market expansion. So we like the business and we'll look forward to continue to talk about it in the near term. Thank you. Thank you.

Operator

Thank you. I will now turn the call over to Jim Lico for closing remarks.

Speaker 2

Well, thanks, Krista, and thanks, everyone, for taking the call. We appreciate the time and energy and enthusiasm of the questions. We obviously have some we'll have some follow-up with many of you and we'll look forward to that. I think what you saw in the quarter, obviously, a few changes on the revenue line. But I think what we've tried to say from day 1 is that we've seen some normalization in the second half.

Speaker 2

We saw that maybe a little bit more in the 3rd than we anticipated. But what we also said is that we continue to drive margins and continue to set the business up for long term sustainability and success. I think the margin expansion you saw, the free cash flow, the number of deals that we did, that's very consistent with the strategy we've outlined. We think we continue to set up for 2024. Well, we'll obviously get to a guide here in the next few months.

Speaker 2

We look forward to finishing the year out here strongly. We'll see you on the road And we look forward to taking your follow-up. Thanks everyone. Have a great day.

Operator

This concludes today's conference call. Thank you for your participation and you may now disconnect.

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Fortive Q3 2023
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