My name is Brock, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Second Quarter 2025 Earnings Results Conference Call. I would now like to turn the call over to Ms. Christina Jones, Vice President of Investor Relations. Ms. Jones, you may begin your conference.

Thank you, and thank you, everyone, for joining us on today's call. I'm joined today by Olumide Soroye, our President and CEO; and Mark Okerstrom, our CFO. Today's call will begin with a brief overview of our consolidated Q2 results which include the results of our Precision Technologies segment. The remainder of our remarks will focus on Fortive's continuing operations following the successful separation of the Precision Technologies business, now Ralliant, which was completed on June 28, 2025. Please note that we will defer any questions related to Precision Technologies to the Ralliant team, who will hold their earnings call on August 12. During today's call, we will present certain non-GAAP financial measures. Information required by Regulation G is available on the Investors section of our website at fortive.com. Our statements on period-to-period increases or decreases refer to year-over-year comparisons unless otherwise specified. We will also 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-K for the year ended December 31, 2024, and quarterly reports on Form 10-Q for the quarters ended March 28, 2025 and June 27, 2025. These forward-looking statements speak only as of the date they are made, and we do not assume any obligation to update any forward-looking statements. With that, I'll turn the call over to Olumide.

Thank you, Christina. Let me begin on Slide 3 with a few key messages. First, this was a pivotal quarter for Fortive. We successfully completed the spin-off of Ralliant on June 28, and we've emerged as a simpler, more focused company, well positioned to deliver durable and accelerated financial performance. In our final quarter as a consolidated company, we delivered adjusted EPS of $0.90 at the high end of our guidance range with 8% growth in trailing 12 months adjusted free cash flow. For new Fortive, on a continuing operations basis, our Q2 earnings and free cash flow results demonstrated resiliency. We delivered adjusted EPS of $0.58 and 14% growth in trailing 12 months free cash flow, despite customer demand pressures in the second half of June, stemming from tariff uncertainty, constrained government spending and evolving healthcare policy dynamics. As previewed in our June 30 Ralliant spin completion press release. Today, we are also initiating guidance for Fortive continuing operations, reflecting our full year outlook and consistent with our new Fortive approach of providing clear and simplified guidance and disclosure. Finally, we remain focused on executing our Fortive Accelerated strategy introduced at our Investor Day 7 weeks ago and designed to drive faster profitable growth and strong shareholder value creation over the medium term. We couldn't be more confident and excited for the road ahead. Touching briefly on Slide 4, which covers our final quarter of consolidated results, including the Precision Technologies segment, now Ralliant. We delivered Q2 adjusted EPS of $0.90 at the high end of our guidance range and generated approximately $300 million in adjusted free cash flow. On a trailing 12-month basis, our free cash flow grew 8% and free cash flow conversion and adjusted net income was 105%. We deployed approximately $140 million towards share repurchases during the quarter. From the time of the spin announcement in September 2024 through completion in June 2025, we allocated over 75% of our consolidated free cash flow to share repurchases, consistent with our previously communicated guidance about capital deployment during the period. Finally, we completed the spin-off of Ralliant ahead of our original timeline, a testament to the power of Fortive Business System-driven execution and the talent and dedication of our teams around the world. From this point on, all figures and comments will refer to Fortive's continuing operations, excluding the results of the Precision Technologies segment. Let's move to Slide 5. With the completion of the spin, new Fortive begins in Q3 as a simplified and focused company with a track record of strong, durable financial performance fortified by our 50% recurring revenues. As shown on this slide, we begin this next chapter with an attractive financial profile and track record, having delivered 4% compounded annual core revenue growth over the past 5 years, with solid growth every year since the global pandemic in 2020. Each of our 2 reported segments have been key contributors to this performance and are poised for acceleration, powered by our Fortive Accelerated strategy. Before we dive into the details of Q2 results, let me highlight some examples of exciting progress our team made in the quarter in executing our Fortive Accelerated strategy on Slide 6. Our strategy is built around 3 core levers for profitable organic growth acceleration: innovation acceleration, commercial acceleration and recurring customer value, all powered by our Amplified Fortive Business System. Our new disciplined capital allocation approach seeks to enhance these organic results by maximizing medium-term equity returns as our North Star. We made meaningful strides in advancing key elements of this strategy in Q2, starting with innovation acceleration. Fluke continues to execute an exciting market-leading innovation funnel. For example, Fluke's 1670 Series Multifunction Installation Tester with TruTest software, Fluke Connect, a wireless connectivity was named most valuable product in Control Engineering's 2025 Product of the Year Awards. At Gordian, we're seeing strong adoption of our new cloud-based assessment and capital planning module, driving double-digit orders growth in that product category. Moving to commercial acceleration, our Latin America growth strategy continues to ramp, delivering double-digit Q2 growth in the IOS segment in the region. At Fluke, we saw high single-digit growth in our priority high-growth applications, including distributed energy and data centers with exciting runway ahead of us, closing with recurring customer value. Our journey at Fluke to increase recurring revenue continued with double-digit ARR growth in the quarter, and we are undertaking AI-enabled customer experience improvements across our portfolio, driving better net dollar retention and customer lifetime value. As an example, Provation launched AI assistants, an intelligent automation to drive productivity in key healthcare workflows. All our organic growth acceleration levers are enabled by our Amplified Fortive Business System, which is at the heart of our culture. In May, nearly 1,000 team members around the world participated in our President's Kaizen Week, tackling growth opportunities with a continuous improvement mindset. It's one of my several weeks of the year, and I was particularly inspired by the pervasive deployment of AI capabilities for impacts across our 34 Kaizen teams and our team's energy around Amplified FBS for profitable growth. Finally, disciplined capital allocation is an integral component of our Fortive Accelerated strategy. At our June Investor Day, we outlined our capital allocation priorities to enhance shareholder returns, invest in organic growth, pursue accretive bolt-on M&A, deploy capital to share repurchases and maintain a growing dividend. Aligned with these priorities, we are activating our bolt-on M&A engine, and we are applying a rigorous disciplined approach based on relative returns to evaluate deals. We are ready to execute attractive bolt-on opportunities with the goal of enhancing shareholder returns. Looking ahead, the future is bright for Fortive. We are emerging from the spin as a more durable and resilient company with a clear plan to accelerate shareholder value creation through profitable organic growth, disciplined capital allocation and a deliberate focus on building and maintaining investor trust. We have rock-solid confidence in the quality of our new Fortive portfolio, purpose-built team and Fortive Accelerated strategy shared at our Investor Day 7 weeks ago, notwithstanding fluctuations in specific quarterly metrics. Our teams are energized, empowered and excited to lead Fortive into this next chapter. I have been spending time with several of our customers, and they are thrilled about our new Fortive direction and eager to be part of our innovation acceleration, commercial acceleration and recurring customer value agenda. With that, I'll turn it over to Mark to walk us through the financial results for Q2, our last quarter before the launch of new Fortive.

Thanks, Olumide. I'll begin with Slide 7. In the second quarter, we delivered total revenue of just over $1 billion, down 0.4% year-over-year. On a core basis, revenue declined 0.7%. Q2 revenue growth for the company was negatively impacted late in the quarter by customer demand responses to macro pressures and uncertainty, which Olumide mentioned earlier and on which I will elaborate in more detail as I go through our segment results. Across the first 10 weeks of the quarter, we saw a continuation of the revenue growth trends we saw in Q1. However, as June progressed, we saw year-over-year growth turn negative in the last few weeks, and we finished the month approximately $30 million below our expectations, driving year-over-year revenue growth on our $1 billion quarterly revenue base into decline territory. Although it's early, July is looking better. Aside from these end-of-quarter factors, the business performed broadly in line with our expectations. From a geographic perspective, North America was slightly positive, but less so than what we had anticipated largely due to the end of quarter factors. Western Europe, China and Latin America were down year-over-year. We delivered adjusted gross profit of $650 million, similar to last year. Adjusted gross margins were also roughly flat year-over-year as FBS-driven pricing actions, growth in higher-margin recurring revenues and lower costs from supply chain countermeasures were roughly offset by tariff-related cost pressures. Adjusted EBITDA was $288 million, in line with Q2 of last year, with adjusted EBITDA margins holding steady versus the prior year. We delivered adjusted EPS of $0.58, up 4% year-over-year, driven by stable year-over-year adjusted EBITDA, coupled with lower interest expense on lower debt balances and the positive year-over-year impact of share repurchases. We estimate direct tariff costs, net of countermeasures, created a roughly $0.02 headwind to EPS in the quarter. This excludes the tariff-related quarter-end demand pressure referenced earlier. We generated $180 million of free cash flow in the second quarter with our Q2 trailing 12-month free cash flow of $939 million, representing a solid 14% year-over-year increase. Our Q2 trailing 12-month free cash flow conversion on adjusted net income was 107%. Moving to our segment results, starting with Intelligent Operating Solutions on Slide 8. Both revenue and core revenue growth were essentially flat year-over-year, which was below our expectations. The back half of June, year-over-year growth turned negative, driven by 2 primary factors: first, general tariff uncertainty and questions around the permanence of tariff-related pricing and surcharge changes, resulted in what we believe was deferred, not canceled customer spending on certain categories of professional instrumentation at Fluke. While overall orders grew in the quarter, the mix of orders, particularly in the final weeks, shifted to longer lead time products, resulting in an increase in backlog and a shortfall in revenue. We expect to deliver most of the backlog over the course of the second half of the year, and we are seeing encouraging signs in July that order mix is normalizing, which would suggest that most of the Q2 revenue slip will come back to us in the next several quarters. Secondly, constrained U.S. government spending and fiscal tightening at state and local governments pressured take rate procurement revenue at Gordian. Gordian usually sees a spike in spending in the last few weeks of Q2 as government entities with the June fiscal year-end rush to use their remaining budgets. Our customer discussions suggest that overall concerns about go-forward funding more broadly created a chilling effect on the usual use it or lose it behavior. Absent the above factors impacting Fluke and Gordian, the quarter would have come in broadly in line with our expectations. As always, there were puts and takes, but we've been pleased with the growth we've seen at Industrial Scientific and the IOS software businesses year-to-date. Adjusted gross profit came in at $461 million, down slightly from the prior year. Adjusted gross margins declined to 66.1% from just under 70% a year ago, primarily due to tariff cost pressures, partially offset by pricing countermeasures and growth from our higher-margin software businesses. Despite the slight revenue and gross profit declines in the segment, adjusted EBITDA grew 2% to $236 million as lower operating costs more than offset the modest decline in gross profit. Adjusted EBITDA margins grew to 33.8%, up from 33.3% in the prior year period. Moving to our Advanced Healthcare Solutions segment on Slide 9. We delivered total revenue of $320 million, which was below our expectations. Revenue was down 1.3% year-over-year and down 1.9% on a core basis. Towards the end of Q2, we saw reimbursement policy changes and uncertainty impact the Advanced Healthcare Solutions segment. Specifically, we saw the deferral of U.S.-based hospital capital expenditures on healthcare equipment, including sterilization machines at ASP and quality assurance devices at Fluke Health with customers citing precautionary deferral of spending while they sort through the impact of reimbursement policy changes. We saw partially offsetting outperformance in other parts of the business with our AHS software businesses outperforming on strong execution and benefiting from resilient SaaS-based revenue models. Absent the end of quarter pullback in healthcare equipment spending, AHS in total would have grown revenue largely in line with our expectations. Despite revenue being down year-over-year, adjusted gross profit was up slightly. Adjusted gross margins were up from just under 58% last year to just over 59% with favorable pricing contribution aided by a mix shift into higher-margin AHS software revenue away from lower-margin hardware revenue. Adjusted EBITDA was flat year-over-year at $86 million as we reinvested very modest gross profit dollar growth into R&D, sales, and marketing initiatives to drive our top line acceleration agenda outlined by Olumide. Despite these investments and declining revenue, adjusted EBITDA margin expanded modestly from 26.6% to 26.9%. Moving to Slide 10 for a brief update on tariffs, which has shifted meaningfully since our Q1 earnings call. Based on current tariff rates in effect or expected to go into effect, we now expect the gross tariff impact for Fortive continuing operations to be approximately $40 million to $55 million in the second half of 2025 and $80 million to $120 million on an annualized basis. The majority of this impact is related to U.S.-China tariffs while the global trade environment remains volatile, and that volatility is impacting our results on the margin. We are actively leveraging the Fortive Business System to adapt and respond. Our countermeasures include pricing actions and surcharges, shifts in our global supply chain and manufacturing footprint, and incremental cost and productivity initiatives. Assuming tariff conditions continue along the path of what is known today, we expect gross tariffs to be mitigated fully by the fourth quarter, and we expect we will see a modest gross margin and EPS headwind in Q3 as our countermeasures continue to fully phase in. Should global trade and fiscal policy remain as volatile as it has recently been, we would expect to continue to see near-term revenue impacts and challenges with revenue visibility of the type we saw in Q2. Turning to Slide 11. We received a $1.15 billion dividend from the Ralliant spin-off, which is reflected in the Fortive continuing operations balance sheet in our earnings release. In July, we used approximately $725 million of proceeds from the dividend to pay down debt, comprising of the entirety of our Japanese yen and euro-denominated term debt and a portion of our 2026 euro bonds. We plan to use the remaining dividend proceeds for share repurchases. The balance sheet figures shown here represent Fortive continuing operations on a pro forma basis, reflecting the debt paydown. From a leverage standpoint, our gross leverage ratio is roughly 2.5x adjusted EBITDA after these debt repayments in line with our stated target. As previously highlighted on a trailing 12-month basis, we generated roughly $940 million of annual free cash flow. This, plus our strong balance sheet and growing adjusted EBITDA gives us ample capacity and flexibility to execute our capital deployment priorities, always with a disciplined focus on allocating capital based on best relative risk-adjusted returns from a shareholders' perspective. Moving to Slide 12. We are initiating our full year adjusted EPS guidance for new Fortive at $2.50 to $2.60 per share. This outlook assumes a continuation of the market dynamics we experienced in Q2. We are not forecasting any material improvement or deterioration. It reflects the expected net impact of tariffs based on currently announced rates. Now let me provide a few additional modeling considerations. From a phasing perspective, we expect Q3 reported revenue to be broadly similar to Q2, including a modest tailwind from FX. We are modeling second half core revenue growth broadly in the range of the core growth we saw in the first half. We also expect AHS core growth in the second half to be similar to Q2 with a more challenging year-over-year comparable in Q3. From an adjusted EBITDA perspective, we expect typical seasonality with Q3 adjusted EBITDA lower than Q2 on a dollar basis. As a reminder, with lower debt balances, our interest expense will be lower in the second half. We continue to expect a full year adjusted effective tax rate in the mid-teens. However, we are modeling Q3's tax rate in the high teens and the Q4 tax rate in the single digits due to discrete tax items in the quarter. Given seasonal revenue and margin patterns and the interest and tax assumptions I just outlined, we expect Q4 adjusted EPS to be meaningfully higher than Q3, which we currently expect to be slightly lower than what we saw in the second quarter on a cents basis. Before I wrap up, I'd like to take a moment to walk through our approach to guidance and disclosure for the remainder of the year. As we have just outlined, we will provide annual adjusted EPS guidance updated quarterly, along with commentary on phasing throughout the year and modeling help on other key P&L line items. Our disclosures will remain focused on key metrics at the Fortive and segment level with color at a lower level of granularity as appropriate to provide clarity on key drivers of performance. This approach reflects our ongoing desire for clarity and simplification in our communications with the investor community. As a final note, before turning it back to Olumide for closing remarks and Q&A, I wanted to directly and clearly state that recent near-term revenue volatility has absolutely no impact on our confidence in the future outlook for our business. And specifically, the medium-term financial framework we shared at our recent Investor Day remains firmly intact. Q3 marks the beginning of our new chapter, and we are moving the pieces into place to drive accelerated growth and shareholder value creation in the coming years. The 3-pillar value creation plan we outlined at our June Investor Day is now solidly in the implementation phase, and I couldn't be more excited for the road ahead.

Thanks, Mark. Let me close our prepared remarks on Slide 13 with a few reflections on what's ahead for Fortive. First, we have a long track record of strong annual financial performance as presented on this page. Solid revenue growth, expanding EBITDA margins and resilient free cash flow in the last 5 years. Q2 2025 was our last quarter before the launch of new Fortive. While core growth in the quarter was below our expectations, our earnings and free cash flow stood up well in the face of unexpected headwinds. We delivered 4% adjusted EPS growth and 14% trailing 12 months free cash flow growth. This is a testament to our team, the operating leverage and cash generation strength in our business and the Fortive Business System. We are excited about what that portends as we return to normal and accelerating growth. With Q2 and the spin behind us, we now enter the era of Fortive Accelerated. Our purpose-built new Fortive team is excited about the opportunity ahead of us, and we thank you all for your interest in Fortive. I especially want to thank our investors, our 100,000 customers and all our Fortive employees around the world across our 10 iconic operating brands who do a tremendous job every day to deliver near-term results and build enduring advantages in our businesses. With that, I'll turn it to Christina for Q&A.

Thanks, Olumide. That concludes our prepared remarks. We are now ready for questions.

Our first question today comes from Julian Mitchell of Barclays.

And congrats on getting the first earnings out of the way as RemainCo or new Fortive. Maybe just wanted to start with the sort of second half moving pieces between the third and fourth quarter. So it seems like maybe third quarter EPS is in the maybe low mid-50s range in terms of cents, perhaps sort of flattish EBITDA sequentially and then there's the tax pressure. And into the fourth quarter, it looks like you need a sort of $0.30 or so increase in EPS sequentially helped by that tax rate dropping in Q4. I just wanted to make sure that, that rough framework made sense in terms of your full year guidance. And just sort of help us understand on the operating line, why do you get such a big lift in Q4.

Yes. Thanks, Julian. I'll take this one. So there definitely are a few things going on. I'd say directionally, you're thinking about things the right way. As a reminder, just normal seasonality of this business is for there to be a step down from Q2 to Q3. So you definitely see that in the way we're sort of shaping the year. Added to that is we do have some negative impact from tariffs still that are going to hit us in the third quarter, which sort of builds upon it. And then as you move into the fourth quarter, again, normal seasonality is the biggest driver. But if you work down through adjusted EBITDA first, you've got a couple of other factors. One is that the tariff countermeasures are fully implemented. And they actually become a slight positive at current rates into the fourth quarter. And secondly, you've got a tailwind from FX, which, again, foreign-denominated currencies, more U.S. dollars in revenue, and the vast majority of our costs are sitting in U.S. dollars. So that does drop through to adjusted EBITDA. That's been compounded as you move down to adjusted EPS because you've got the discrete items on tax rate that we mentioned, which pushes tax rate down into the single-digit zone. You've got lower interest expense on lower debt balances. And then you've also got the year-over-year impact of share repurchases, they're helping EPS as well.

That's helpful. And then just my follow-up would be around a couple of the main end markets that led to the shortfall in Q2 and how you're thinking about those playing out from here? In particular, I suppose, the government pressure at FAL. What are you assuming there in terms of how much faster that improves? And then in healthcare, just unpack a little bit because you had the sort of selling days headwind in Q1 and then it seems to morph into something more problematic late in Q2. Sort of what are you seeing right now there in Q3?

Thanks, Julian. I'll address that. Overall, Q2 unfolded as we anticipated, aside from three specific issues I'll discuss. First, regarding FAL and government spending at Gordian, we faced a challenging comparison coming off a strong 2022 and 2023 with double-digit growth. We knew this might affect us. June is typically a significant month for this sector because many state and local agencies conclude their fiscal year, resulting in a surge in spending, which wasn’t as robust this year as it had been in previous years. However, we are confident that the essential projects in the pipeline for these communities will move forward. While it’s difficult to predict the exact timing of when this revenue will materialize, our guidance takes into account a range of possible outcomes. We have sufficient other factors to support our guidance, although the timing of these projects remains uncertain. Regarding healthcare, the overall segment continues to perform well. However, we noted a specific issue in June related to capital equipment purchases by hospitals. With the One Big Beautiful Bill being signed on July 4, hospitals were focused on understanding the provisions and their impact on finances, particularly concerning Medicaid and uninsured patients. As a result, many hospitals deferred essential purchases for sterilization and safety equipment. We have observed some positive trends in July indicating these purchases are returning, though we haven’t assumed all of it will happen in Q3 or Q4. Our guidance remains secure regardless of the timeline. Finally, concerning Fluke, the situation is straightforward. The POS was strong, and we saw growth in orders. However, there was a slight shift from short cycle to longer cycle orders in late June, which created a backlog. We expect this backlog to decrease over the coming quarters, and our guidance covers various outcomes. Overall, we had a solid quarter and are confident in our assumptions.

So I think you said sales in line with 2Q and 3Q. And then you clarified to the previous question that sales normally down Q-on-Q. So just wanted to clarify that point. Is organic sales in 3Q consistent with the modest decline we saw in 2Q? Just want to pin that one up.

Yes. I mean I would think on a consolidated basis, it's roughly in line. The one thing to keep in mind is that for AHS specifically, I would expect the back half growth rate to be consistent with what we saw in Q2, again, really largely on the factors that Olumide mentioned. There continues to be pressure on healthcare reimbursement rates, and we don't expect that to subside any time in the back half of the year.

Okay. So just to clarify, is the organic sales growth consistent with the second quarter based on a solid basis or dollar sales?

Dollar sales.

Okay. So that implies...

The back half core growth rate to be roughly.

Okay. And so that implies that IOS organic sales growth would improve materially in 3Q, but AHS still in that down 2% type of range. If we're seeing this temporary dislocation in June from the sterilization equipment, why wouldn't AHS improve in the second half of the year?

Yes. Let me address that, Nigel. That is an important question. I think one factor is that the Q3 2024 comparison for AHS is quite high, which contributes to what you are observing. Therefore, Q3, particularly for AHS, is not expected to show the rapid improvement that IOS will experience. Additionally, just to be cautious, we have taken into account that, as Mark mentioned, the academic hospitals differ from rural hospitals. We have assumed that it may take some time for everything to stabilize. In contrast, with Fluke, we are aware of its backlog and are more confident in managing that since it is within our control. So, there are factors related to the comparison effect in Q3 for AHS and the specific challenges we faced in late June, along with our expectations for how quickly those issues can be resolved.

So your comps certainly do get tougher, so I see that. And then just a quick one on Gordian. It seems like you had a little bit of the June year-end friction around use it or lose it. So just to be clear that, that business has recovered in Q3 so far. I'm just wondering, could you maybe just give us some renewal rates around Gordian or the IOS software? That would be helpful.

Yes. Regarding the Gordian situation, there were specific challenges at year-end for the state and local segment. We are noticing some improvement in July, but it's too soon to declare complete success. In terms of our overall software renewal rates, I can say that all our software businesses performed well with strong net dollar retention in the quarter. Renewal rates are solid across the board. Our focus is on enhancing expansion, cross-selling, upselling, and pricing strategies to drive our net dollar retention even higher. From a renewal perspective, the performance has been very strong. As Mark mentioned, there were three areas that did not meet our expectations, but overall, everything else went exceptionally well for us this quarter, which gives us confidence in the medium-term outlook we shared seven weeks ago.

I agree with Julian's congratulations on your first quarter as a public company. At a higher level, I want to understand the rationale better. It seems that you won't be providing guidance on organic growth at a high level, but rather just offering some insights on that. Is that correct?

That's the intention, Steve. And I think I would think about it as we're going to try this approach for the back half of the year. We want to get feedback as we go. And really, just to reiterate the goals here. Number one is, we just really wanted to simplify the way that we communicate with investors. That's certainly been a strong point of feedback from the broader investment community for us, and we've taken that on board. Secondly, though, just to be very clear, our sights are very much set on the value creation plan that we laid out. It's a multi-year value creation plan. And so part of the simplification effort is to make sure that we have the ability from quarter to quarter and across P&L items to make business decisions that are smart business decisions that will support that medium-term value creation goal. And that's what's led us to, again, annual adjusted EPS only with hopefully modeling help that is maybe more helpful than specific quarterly guidance might have been in the past.

I believe that one number might not be sufficient, but we will see how it develops over the next few quarters. Olumide, you mentioned being prepared for bolt-ons, and I expected there might be a pause in that area. Are you altering your approach compared to what Fortive has done in the past? Has there been any reset in the process, or should we view this as a continuation of the strategies implemented over the last few years?

Thank you, Steve. We've aimed to clarify that our approach to capital allocation is significantly different. First, we are dynamically balancing share repurchase with strategic mergers and acquisitions focused on smaller, complementary businesses. This marks a shift in our strategy. Additionally, we have increased the financial and strategic scrutiny applied to these bolt-on acquisitions. We have a strong history with these deals and are now more selective in our evaluation. Since announcing the spin in September 2024, we've been quiet, but during this time, we've been nurturing exclusive opportunities with assets that align with our strengths and where we can effectively create value. We are now beginning discussions to identify which of these opportunities can meet our high standards for being accretive and strategically aligned while also meeting our financial criteria. While the timing for execution can be unpredictable, we are ready to pursue these opportunities. We maintain a strong discipline and ensure that any deal we undertake meets our rigorous standards. We are open for business while holding ourselves to a high bar.

Yes, I'm still a little confused on a couple of the guidance inputs here myself. So I think we've got AHS nailed down. But what are you implying for IOS then? Dollar sales roughly equivalent in Q3 and then a seasonal pickup in Q4? Can you just clarify that?

Yes. I would think about IOS broadly is following the same pattern that we spoke about for Fortive in total. So you will see a pickup in core growth through Q3. And I think about the back half in total as being broadly consistent with what we saw in the first half in terms of core growth rates.

It seems you're suggesting there are lower margins on flat sequential revenues in AHS. Is that accurate? Can you clarify where the margin pressure is coming from in Q3?

In Q3, I believe AHS is generally consistent with a slight decline compared to Q3 of last year, mainly due to the trends we observed, including the impact of tariffs. For IOS, I expect a minor decrease as well due to the same tariff effect. However, we anticipate a recovery in the fourth quarter based on the factors we discussed.

I apologize, but there's an upper bound on high teens and a lower bound on single-digit tax rate for Q3 and Q4. Could you share your expectations for the annual tax rate to help us better align our calculations?

Yes. I mean I would think about annual tax rate in, the, call it, 14% to 16% zone.

Christina, congrats on getting all the stuff done. I'm sure it was a lot of work. But in that context, as I just wanted to ask, how big of a distraction was it to the organization with the spin and the management change kind of at the similar time, I would imagine that would create some angst amongst folks, but maybe some color around that.

Thanks, Scott. I appreciate the immense effort our teams put into executing the spin while also delivering a strong quarter and achieving the high end of our adjusted EPS guide. It was a significant undertaking. Regarding the leadership change, while I'm not new to the team, it still represents a shift. What makes Fortive unique is that it's not about any single person; all 10,000 of our team members are deeply ingrained in the Fortive Business System, which guides everything we do. In that respect, there wasn't much disruption for most of our operating companies, where we focus on serving our customers. Most of the spin activity was handled by the corporate team. So while there was change, it's important to recognize that we still had a solid first half, despite facing some challenges related to core growth late in the quarter, which amounted to $30 million on a $1 billion revenue base. Our teams showed remarkable resilience and focus. The excitement about the future and the journey we're on with Fortive Accelerated is truly inspiring.

So you mentioned the deferred spending at Fluke toward the end of the quarter, but you said that the order mix, I think, is normalizing. I guess the question is, why did you see a bit of a gap down now? Because Fluke has been, as you know, pretty stable for a long period of time, even, I think in the initial tariff-related volatility. So how much do you worry, if at all, that it's just maybe more macro uncertainty creeping in? Or it's just this sort of temporary thing? And what are you seeing in the channel?

Thank you for the question. I want to take a step back and address the overall performance of Fluke. You're correct in noting our strong confidence and excitement about the unique position of that business. In the realm of industrial professional instrumentation, it's difficult to find a company that matches our brand strength, gross margins, and the resilience we've demonstrated. Notably, 15% of our revenue now comes from recurring sources, which continues to experience double-digit growth in annual recurring revenue. Everything about Fluke remains unchanged, particularly our focus on innovation, which enhances an already strong narrative. Regarding the second quarter, the dynamics were largely driven by customers delaying a few significant orders as they wait to see the outcome of tariff discussions, while also depleting their existing inventory. Many of these customers are starting to return now. So, the overarching story is that Fluke continues to perform robustly, and we're optimistic about the future. Our guidance for the second half reflects a cautious and balanced perspective based on what we observed in the first half, particularly given that the tariff situation is still uncertain. We can't predict exactly how these factors will impact various markets, including Western Europe, China, and Latin America, where other dynamics are at play as they shift investments toward defense. With that in mind, we conservatively estimate that the second half growth for Fluke and IOS will mirror what we experienced in the first half, while acknowledging that several factors could allow for acceleration as we move into next year. The fundamentals of Fluke remain solid, and we are actually more enthusiastic about our medium-term prospects than ever before. However, we aim to approach the second half guidance with prudence and balance.

That's helpful. Can I ask a follow-up? When I look at China and Europe, it seems like those regions are at best stable, and there might have been a slight decline as you transition to defense in Europe. What are you observing there? Are you experiencing stability, or is it somewhat weaker in those areas? More information would be appreciated.

Yes, certainly. From a point-of-sale perspective, North America has been our strongest market, and we expect this trend to continue throughout the year, with strong double-digit growth. In contrast, Western Europe and much of the Asia-Pacific region are seeing flat point-of-sale performance, which aligns with our expectations for the year. We do not anticipate significant changes in these markets. We believe North America will maintain its strength, bolstered by policy changes that are likely to increase industrial manufacturing capacity in the U.S. As for China, it seems to have reached a low point and is likely to improve moving forward, especially since tariff discussions appear to be nearing a resolution, which should alleviate some concerns and foster recovery over time. Meanwhile, Western Europe presents uncertainty as the region navigates active conflicts and key decisions about defense spending and its economic impact. Nevertheless, I remain optimistic about our team's innovative efforts in these markets and our ability to manage the factors within our control.

I'm curious about the pressure on hospitals and how reimbursement impacts their margins, especially since many are non-profits with very thin margins. Does this lead them to consider more single-use applications, since they are focused on reducing their spending at any given time, as opposed to investing in larger-scale equipment?

No, we don't think so is the short answer. If you consider what this means for health care providers, it suggests they might experience pressure on reimbursement. They could also face some pressure on their insured customer base, which may impact volumes. So, what are they likely to do about that? The first thing to consider is that the profit center for hospitals is in the operating room, so they will likely try to increase activity there. As they do, it is important to note that single-use products have many disadvantages, including effectiveness and total cost of ownership when compared to highly effective instruments like robotics and endoscopes that are essential for the most profitable procedures in the OR. We are observing a significant shift towards more advanced devices that are associated with more profitable procedures. These devices are not for single use and require stringent sterilization methods that align with our strengths. Recently, I was at one of our major hospital clients, and they expressed a growing need for our support as the market evolves. They mentioned the necessity for increased throughput in the operating room, emphasizing the demand for tools that effectively manage robotics and endoscopes. The focus is now on higher-value, more effective, and complex devices rather than single-use products, as the total cost and effectiveness comparison does not favor single-use options. Well, overall, we've tried to keep it simple, which is that we have clear strategic and financial criteria. And whether it's a software asset, consumable recurring revenue asset, kind of a differentiated, very durable hardware asset, they have to meet the same criteria. So we've shown that irrespective of the type of asset, when we apply the new focus we have on proprietary deal cultivation, this is like we're not waiting for a banker-led process. We're actually cultivating this over many years, whether it's software or hardware, you can get a great asset. And price is very much part of our strategy when we think about the accretive nature of this asset. So you get a great asset, but also at the right price that obviously, to your point, is compatible with kind of the multiple we're trading at and give us a chance to be accretive from that perspective. We feel confident that we don't need to draw strict boundaries as long as we adhere to the principles we've established. In the second half of 2023, for example, we acquired a software asset that aligned well with our pricing criteria. There was no need to overextend ourselves financially. Additionally, we incorporated some data AI and hardware assets into our strategy. We'll continue to adhere to our established criteria, and if an opportunity fits, we will pursue it; if it doesn't, we are not compelled to make a deal.

I'll also add my congrats. I missed the first couple of minutes at the opening. So I don't know if this got to addressed. But anything on stranded costs? Is new Fortive already sized appropriately post spin? Anything on kind of repositioning that and what the timing would be in size?

Yes. Thanks, Deane. I'll take that. I'd say we're broadly on track with the guidance that was given previously. We've got about, I think, half of the stranded costs that are done and dusted and we're going to work on the rest over the next, call it, 12 months or so. I would also say just generally, as a team that sort of got this opportunity to drive medium, long-term value creation here, we are looking at opportunities around the business to just be more efficient to be able to divert dollars to their highest and best use. So I think in addition to stranded costs, I mean, we're going to be on the lookout for other opportunities to essentially just drive better performance across the business through cost discipline.

Great. And then just as a follow-up. On the cadence of the months, June being down, July bounced back, stabilized. We've heard that elsewhere today and some another industrial. Can you just expand on that? What were the businesses that were down in June? Was that deferred? And you think that will still the return in July? You still might see some of those deferred projects coming back over the next couple of quarters. But just kind of digging there, what were the businesses and expectations for the quarter?

Yes, there are three specific areas to highlight. First, in our short-cycle professional instrumentation product groups at Fluke, customers with significant orders decided to wait for clarity on tariffs set for July 9 and August 1. Many of them are now returning to place those orders, so we are optimistic about a quick resolution. The second area involves healthcare capital equipment. Hospitals were holding off due to uncertainty surrounding the Big Beautiful Act and its impact on their budgets before committing to new equipment. The sales pipeline remains strong, and we have not lost any of those deals. The timing for when customers place orders has shifted to the right; we are cautious but believe conditions are improving in July. Finally, in the state and local government procurement business, projects in our communities, such as fixing leaking roofs and replacing mechanical equipment in K-12 schools, faced delays as many organizations had less funding available at the end of June. While some projects have been deferred, they are still necessary and will eventually move forward. Overall, everything else at Fortive is on track with our expectations aside from these three areas. We remain positive about their resolution and have been careful in our assumptions about how quickly things will return to normal.

This now concludes our question-and-answer session. I would like to turn the floor back over to Olumide for closing comments.

Excellent. Well, thank you all for joining us. We appreciate your interest. Our team, as you hopefully can sense, is incredibly excited about the opportunity ahead. We've laid out the plan to have this company in its simpler and more focused form grow faster. We got our entire leadership team together to get everyone aligned on that. Just in the last couple of weeks here, the excitement level is really high for us. We also said our capital allocation is a critical part of our value creation strategy. So the discipline on that is going to be ferocious from our point of view going forward to make sure we're beyond reproach. And then just making sure that we build and maintain investor trust. And again, hopefully, you're seeing that in the way we are approaching these communications. We thank you for your interest, and we'll see you around.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines, and have a wonderful day.