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Fortive Corp
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Good afternoon, ladies and gentlemen. My name is Jason, and I will be your conference facilitator this afternoon. At this time, I would like to welcome everyone to Fortive Corporation's Fourth Quarter 2020 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
I would now like to turn the call over to Mr. Griffin Whitney, Vice President of Investor Relations. Mr. Whitney, you may begin your conference.
Thank you, Jason. Good afternoon, everyone, and thank you for joining us on the call. With us today are Jim Lico, our President and Chief Executive Officer; and Chuck McLaughlin, our Senior Vice President and Chief Financial Officer. We present certain non-GAAP financial measures on today's call. Information required by SEC Regulation G relating to these non-GAAP financial measures are available on the Investors section of our website, www.fortive.com, under the heading Investors Quarterly Results. We completed the divestiture of the Automation and Specialty business on October 1, 2018, and accordingly have included the results of the A&S business as discontinued operations for historical periods.
We completed the separation of our prior industrial technology segment through the spin-off of Vontier Corporation on October 9, 2020 and have accordingly included the results of the industrial technology segment as discontinued operations. The results presented on this call are based on continuing operations. During the presentation, we will describe certain of the more significant factors that impacted year-over-year performance. All references to period-to-period increases or decreases and financial metrics are year-over-year on a continuing operations basis.
During the call, we will make forward-looking statements within the meaning of the federal securities laws, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements that we make today. Information regarding these factors that may cause actual results to differ materially from these forward-looking statements is available in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2019, and subsequent quarterly reports on Form 10-Q. These forward-looking statements speak only as of the date that they are made, and we do not assume any obligation to update any forward-looking statements.
With that, I'd like to turn the call over to Jim.
Thanks, Griffin, and good afternoon, everyone. Today, we are pleased to announce our fourth quarter 2020 results, which reflect a strong finish to the year. For the quarter, we delivered adjusted diluted net earnings per share of $0.70, an increase of 19% year-over-year, as well as total revenue growth of 4.9%, which exceeded the high-end of our guidance and included a return to positive core growth, the quarter underlying the increased resilience of our portfolio and represented a continuation of the sequential improvement in topline performance that we have seen since late in Q2.
Despite the continued challenges associated with the COVID-19 pandemic, our disciplined application of the Fortive Business System helped drive more than a 100 basis points of core operating margin expansion and a 39% increase in free cash flow. The better topline performance in Q4 reflected a combination of durability across the recurring revenue portions of our portfolio and clear improvement at Fluke and Tektronix. The strength of our recurring revenue, which now accounts for approximately 39% of our total revenue, provided an important source of stability throughout 2020.
In Q4, this was most notable among our SaaS offerings, which generated low-teens growth. The application of FBS customer success tools also continued to deliver improvements in net revenue retention, which climbed to greater than a 101% for the full-year. Our SaaS performance helps offset the challenges the software businesses are having with customer site access for the provision of services, as well as extended timelines for contract renewals.
The fourth quarter also saw Fluke and Tektronix returned to positive growth. Both have seen steady improvements since the middle of Q2, driven by better point of sale trends across major geographies and continued successful new product launches. On January 19th, we disposed of our remaining 19.9% ownership stake in Vontier through a tax-efficient Debt-for-Equity Exchange. This transaction represents the final step in the Vontier separation.
With the combination of the Vontier spin proceeds, the Debt-for-Equity Exchange and our continued strong free cash flow, we have reduced our net debt by approximately $3 billion since the beginning of Q4 with a net leverage ratio currently at approximately 1.3x. We have significant capacity to pursue key capital allocation priorities.
With that, let's turn to the details of the quarter on Slide 4. Adjusted net earnings were $252.9 million up 19.3% from the prior year and adjusted diluted net earnings per share were $0.70. Total sales increased 4.9% to $1.3 billion with core revenue up 0.7%, reflecting continued sequential improvement from the prior quarter. Acquisitions contributed 260 basis points of growth and favorable foreign exchange rates increased growth by a 160 basis points.
We are particularly pleased to deliver adjusted gross margins of 58.5%, representing a new high for Fortive, which highlights the significant portfolio transformation accomplished over the last few years. Gross margins also benefited from our ongoing investment in innovation, continued application of FBS growth tools and another quarter of strong pricing.
Adjusted operating profit margin was 23.2% for the quarter. This reflected 130 basis points of core margin – operating margin expansion, including positive core OMX for each of the segments. This was the second consecutive quarter with greater than a 100 basis points of core OMX. The Q4 margin performance also contributed to 50 basis points of positive core OMX for the full-year 2020.
During the fourth quarter, we generated $313 million of free cash flow, representing conversion of a 124% of adjusted net earnings and an increase of 39% year-over-year. Including this fourth quarter contribution, our full-year 2020 free cash flow was $902 million, representing conversion of 120% of adjusted net earnings and an increase of 44% year-over-year. Our 2020 free cash flow performance in particular showed the resilience of our portfolio and the power of the Fortive Business System to drive consistent strong increases in free cash flow.
On Slide 6 of today presentation, we showed the region-by-region breakdown for the fourth quarter, in which we continue to see sequential improvement across our major regions. In Asia, core revenue increased by low-single digits, highlighted by high single-digit growth in China and mid single-digit growth in India. Continued strength in China was broad-based, led by mid-20% growth at Sensing, mid-teens growth at Fluke and high-teens growth at Advanced Sterilization Products.
The strength in China and India was offset by declines in most of the rest of Asia. Western Europe core revenue increased by high-single digits in the fourth quarter with high-teens growth at Fluke Health Solutions, high single-digit growth at Tektronix and mid single-digit growth at ASP. North America core revenue was down slightly in the fourth quarter as low-teens growth at Tektronix and high single-digit growth at Censis was primarily offset by declines at ASP and Industrial Scientific. Fluke improved to flat core growth in North America, driven by strong performance at Fluke Calibration and return to growth at Fluke Industrial.
Turning to our segments. Intelligent Operating Solutions posted a total revenue increase of 3.2% despite a 0.3% decline in core revenue. Acquisitions increased growth by a 170 basis points while favorable foreign exchange rates increased growth by a 180 basis points. Core operating margin increased 280 basis points as price realization, improved mix and higher volumes of Fluke resulted in segment level adjusted operating margin of 28.7%. Fluke’s core revenue returned to positive growth in the fourth quarter, increasing by low-single digits. Fluke saw another quarter of strong growth in China, which increased by mid-teens in addition to seeing continued improvements in North America and Western Europe, which were flat and down low single-digits, respectively.
Point of sale showed improvement with North America still negative, but better sequentially, Western Europe turning positive and China continuing at a positive high single-digit rate. Fluke saw a strong performance at Fluke Calibration and Fluke Digital as well as solid growth at Fluke Industrial. Fluke Digital was led by another strong quarter from eMaint, including low double-digit SaaS growth. Fluke continues to see momentum from recent product launches, including its ii910 Sonic Imager, which was launched in November.
Industrial Scientific core revenue declined by mid-single digits in the fourth quarter. iNet continued to see good growth, which was more than offset by continued oil and gas related pressure at IFCs instrumentation and rental businesses. Separately, Intelex continued to perform well with revenues increasing by low-double digits.
The fourth quarter also represented a record bookings quarter for Intelex, which has seen strong traction and its expansion into Western Europe. Intelex is benefiting from the implementation of FBS, which contributed to the successful rollout of enhanced sales funnel management and digital marketing lead generation tools. In November, Intelex also completed the acquisition of ehsAI, a leading provider of artificial intelligence and machine learning for the automation of permitting and regulatory compliance management. The addition of ehsAI significantly enhances Intelex ability to deliver Applied Intelligence and Advanced Analytics to a broad range of customers.
At Accruent, we also saw significant sequential improvement, driven primarily by strong growth in SaaS offerings. While Accruent declined by low-single digits for the quarter, its SaaS business increased by mid-teens. Accruent also continued to apply FBS to drive improvement in churn in the quarter, bringing net retention for the year to greater than a 100%.
Despite some continued pressure from customer site access issues, Accruent is seeing good bookings for its Meridian, engineering and information management offering as we partner with customers on their digital transformations and highly regulated markets, such as life science and pharma. We also continue to bring new offerings to market to address work – returned to work requirements, including a recent win for Accruent’s EMS space management software product for Cushman & Wakefield.
Gordian declined by high-single digits due to headwinds associated with budget challenges and uncertainty across state and local government in higher education customers, as well as continued site access issues. Gordian’s RSMeans business were low-single digits, driven by mid-teens growth for its SaaS offering, supported by the successful implementation of virtual platforms for training and onboarding. Gordian also saw signs of improvement in project activity and its job order contracting business towards the end of the quarter.
Turning to our Precision Technologies segment. We posted a total revenue increase of 2.3% with 0.7% increase in core revenue. Favorable foreign exchange rates increased growth by a 160 basis points. Core operating margin increased 30 basis points, resulting in segment level adjusted operating margin of 22.2%.
Tektronix delivered mid single-digit core growth in the quarter with low-teens growth in North America and high single-digit growth in Western Europe. Tektronix continued to benefit from better point of sale trends in both regions with significant improvement from Q3. China saw low single-digit decline due primarily to the negative impact of the expansion of trade restrictions, partially offset by good year-over-year point of sale growth and momentum from small and medium enterprise customers.
Looking across the product lines. The improved topline performance in Q4 was driven by low double-digit growth in both Keithley and the mainstream mixed-signal oscilloscope platforms. Growth in mainstream oscilloscope continues to be led by the 6 Series line of scopes, which has seen strong demand for the new six and eight-channel versions since they were introduced in Q3.
Sensing Technologies declined low-single digits in the fourth quarter. Sensing performed well in China with mid-20% growth, driven by gains in critical environment applications, et cetera, and increased OEM demand for Hengstler-Dynapar’s factory automation offerings. North America revenue increased slightly, while Western Europe declined low-single digits with both regions showing clear sequential improvement.
Sensing’s improved topline performance was primarily due to continued strength in medical and semiconductor end markets. Setra’s recently launched AIIR Watch Negative Pressure machine for isolation room applications has performed well, generating strong initial orders since its launch early in the quarter with orders from a range of customers across medical offices, long-term care facilities and schools.
PacSci EMC declined low-single digits as they continued to face COVID-19-related pressures across certain elements of its supply chain. The company did see clear sequential topline improvement versus the third quarter, as well as another quarter of strong bookings. EMC entered 2021 in a strong backlog position as its leading technology and innovation capabilities continue to drive strong demand.
Moving to Advanced Healthcare Solutions. Total revenue increased 12% with a 2.6% increase in core revenue. Acquisitions added 830 basis points to growth, while favorable foreign exchange rates increased growth by 110 basis points. Core operating margin increased 50 basis points, resulting in segment level adjusted operating margin of 24.1% up significantly versus Q3 and driven by strong margin lift at ASP as we continue to exit the transition service agreements.
ASP declined mid-single digits as pandemic-related pressure on elective procedure volumes remain a headwind. Elective procedure volumes averaged approximately 93% of pre-COVID levels across the company's major markets, but were lower than anticipated and did see slowing toward the end of the quarter. ASP continued to perform well in Western Europe with mid single-digit growth in addition to high-teens growth in China.
In the U.S., ASP declined low-single digits as growth and capital placements from improved sales execution and funnel management, partially offset the weakness in consumables revenue. ASP service business continues to perform well with the ongoing deployment of FBS tools, helping to drive service sales and optimize service delivery processes. With additional day-two closings in Q4 and early 2021, approximately 99% of ASPs global revenue is now fully under our control and off of transition service agreements.
Censis grew by high-single digits in the quarter, site access of hospitals improved early in the quarter only to then reverse as the quarter progressed. Censis topline performance was led by its SaaS-based Censis track offering, which grew low-double digits driven by a combination of new customer acquisitions and successful upselling of existing customers. This growth was partially offset by high single-digit decline in professional services revenue tied directly to the ongoing challenges with customer site access.
Fluke Health Solutions generated mid-single digits growth in Q4. FHS grew slightly in North America against a challenging comparison. This growth was led by strong performance across both Fluke Biomed and the Landauer radiation monitoring business. FHS continues to seek good initial momentum across the two software platforms introduced over the past 12 months.
1QA which enhances workflow efficiency and test automation for biomedical customers and optimize, which provides tracking and optimization of radiation dose management for radiology departments. Both platforms reflect FHS is focused on bringing forward software and AI-enabled revenue models to build on its strong existing recurring revenue base.
Invetech had another strong quarter with greater than 50% growth. The company saw significant sales and order momentum throughout the year, including a strong finish in December. This growth was led by Invetech’s design and engineering offering, which more than doubled on a year-over-year basis in Q4. The company saw strong growth in the diagnostics market driven by near-term projects to develop rapid testing capabilities for COVID-19 as well as strong demand from the cell therapy market tied to the production from next-generation therapeutics.
On Slide 11, we highlight the progress made in 2020 with respect to our corporate social responsibility efforts, which is one of our key strategic initiatives. Throughout the year, we enhanced the rigor and integrity of our data collection by transitioning our EH&S sustainability and risk assessment processes to the Intelex platform. Our enhanced data analytics, improve insights to accelerate our sustainability efforts and give greater transparency to key stakeholders.
To support inclusion and diversity, our employee and friends resource groups focused on improving employee connections across the organization, while utilizing FBS to enhance their impact. We also expanded our commitment to the CEO in Action Pledge by participating in the 2021 Racial Equity Fellowship aimed at promoting corporate best practices to address systemic racism and social injustice. We are using FBS tools to develop standard work for greenhouse gas accounting and reporting and scaling Energy Kaizen efforts more broadly across the portfolio. This has resulted in making substantial progress toward our greenhouse gas reduction goals, which we expect to achieve ahead of schedule.
Finally, Fortive employees around the world continue to support our local communities through our efforts in our annual Day of Caring with over 35,000 hours of service in 60 worldwide communities. We are living our values to achieve our CSR goals, and we are excited to continue driving progress in the years ahead.
Turning to guidance on Slide 12. We are instituting formal earnings guidance for the full-year and the first quarter of 2021. For the full-year, we expect adjusted diluted net earnings per share to be $2.40 to $2.55, representing year-over-year growth of 15% to 22% on a continuing operations basis. The annual guidance assumes core revenue growth of 4% to 7% and an adjusted operating profit margin of 22% to 23%, and an effective tax rate of approximately 14%. We also expect free cash conversion to be approximately 105% of adjusted net income.
We are also initiating our first quarter adjusted diluted net earnings per share guidance of $0.56 to $0.60, representing year-over-year growth of 22% to 30%. This includes assumptions of 5% to 8% core revenue growth and adjusted operating profit margin of 21.5% to 22.5%, and an effective tax rate of 14%. We also expect free cash conversion to be approximately 75% of adjusted net income.
Before we wrap up, I'd like to thank the Fortive team for their efforts in 2020. I'm tremendously proud of how our teams rose to meet the many challenges posed by the COVID-19 pandemic. With a focus on keeping our employees safe, helping frontline workers combat the virus and continuing to provide our customers with our essential technologies.
Despite these challenges, we made substantial progress across a range of strategic imperatives over the course of the year. The focus and dedication of our team around the world enabled us to significantly transform the portfolio, while transitioning to a work-from-home environment and ensuring continued execution across the portfolio to deliver strong margin performance and consistent free cash flow growth.
As a result of that hard work and a significant progress that enabled, we are in a strong position as we turn our focus to 2021, while navigating some of the continued challenges in the near-term. With a portfolio comprised of leading businesses that are well positioned in attractive markets, considerable opportunity to accelerate our growth through continued investments in organic innovation and acquisitions and the support of a strong culture rooted in the Fortive Business System, we are very excited about the road ahead.
With that, I'd like to turn it back to Griffin.
Thanks, Jim. That concludes our formal comments. Jason, we are now ready for questions.
[Operator Instructions] Your first question comes from the line of Nigel Coe from Wolfe Research. Your line is open.
Thanks. Good morning, good afternoon. [Indiscernible] in the books. So maybe for Chuck, the margin framework looks reasonable, obviously based on execution in 4Q, [indiscernible] in terms of what we should expect through the year. We still sort of added back costs in a gradual way to manage to incremental margin of 35% or I'll be pushing them to the higher earning incrementals.
Thanks, Nigel. We're still thinking for the year 35%, but maybe if I help you to understand it. We're really thinking about some of our temporary costs coming, spring back more impactfully in Q2. So that'll probably be in 25, but if you look at the other quarters, likely to be 40% in Qs, one, three, and four, and maybe that's a better margin profile for us going forward. Does that helpful for what you're looking for?
Absolutely. That's great, Chuck. And then just hone in on the AHS, [36%] in both 1Q and 2021, I’d have thought that maybe the growth rate might accelerate beyond 1Q, especially as ASP maybe normalizes the [NCG] comp. So just to be curious on [indiscernible] maybe Invetech sounds like that's got some real life sciences and biopharma applications, just wondering what sort of revenue base we have for Invetech right now.
Yes. It's interesting because we normally don't talk about Invetech, now that it's in a smaller segment, obviously a little bit more material. But I think the more important thing is given the strength of the business and the work they did, a little bit of an opportunity to talk about the good work they're doing. And that business that we’re talking about in the prepared remarks, Nigel is really focused on really design and engineering resources for diagnostic companies as an example. So think of it as outsourced engineering capability.
And as we said in the prepared remarks, a number of opportunities around testing companies that were looking at COVID-19 and also maybe more broadly and more longer-term in cell therapeutic. So number of opportunities. The business is a little bit lumpy because of the nature of the business model. We're working to change that over time. The leadership team has done a nice job of that, but I think first and foremost, they've done a nice job of growing the business. They were up, I think for the year up over 20%.
So good – roughly think of it as under a $100 million business, so that kind of number. Relative to ASP, I think your question was around AHS and the growth rate at AHS, if I had it right. But I'll talk about AHS and ASP in terms of the growth rate. We certainly have good growth. If we were to think about the guide we've got out there, AHS will probably be one of our better growers. They'll run into a couple of comp issues at FHS an example in Invetech in the second half. But I think if we look on a two-year stack basis, you would see progressively better growth through the year at AHS. And that's on the backs of really ASP, continuing to be good. There is an assumption there that we get vaccinated here, that hospitals get elective procedures back on track by the second half. I think that's a comfortable assumption at this point.
Okay. Thanks guys.
Thank you.
Your next question comes from the line of Julian Mitchell from Barclays. Your line is open.
Hi. Good afternoon, and thanks for giving all of that detail in the slides. Maybe first question around the free cash flow guidance. So you clearly had an exceptional 2020 with that 120% adjusted conversion. It's guided to moderate maybe to a 105% I think this year. So maybe in absolute dollars growing low or mid-single digits versus that high-teens earnings increase. Maybe help us understand how much of that is just kind of conservatism or is something happening with working capital or those prepaid expenses or CapEx coming back or something?
Hey. Good evening, Julian. This is Chuck. Thanks for the question. Yes, there's a couple of things I want to point out in the free cash flow. We're very proud of how we manage through the year and 2020. Going forward though, keep in mind, there's some tailwinds that came in through the year relative to the CARES Act. And not only did we get a moratorium on some of those taxes that we have to pay back over the next two years, but we also have to reinstate that. So we're a little overstated in – not overstated. 2020 came in stronger because of that, but that's about a $50 million headwind in 2021.
And then the second part would be around working capital as we start to reengage and see growth here and prudent to put to say that, our turns may not go down, but it will probably be a little bit of use of cash as we grow those businesses. So I think we've got another $50 million for that. Those are the two biggest things that's going on there.
Thank you. And then my second question really on that revenue guidance for the PT segment. So you're starting out in Q1 with low double-digit even core growth perhaps, the years guided mid single-digit, second quarter should have an easy comp. So it looks like you're dialing in a fairly steep slowdown in the back half of the year. Is that based on sort of the experience of prior upturns and how quickly you can get that surge and then a fade again? I'm just trying to understand some of the main assumptions in that core sales guide to PT.
Yes, sure. So you really got the – you got a couple of pieces there. You've got Sensing business and Tek are the two big pieces there, Julian. I think number one is, if you look on a two-year stack, we'd see the business continuing to do pretty well. So some of it has a little bit to just to do with the comps. The growth rates will look a little bit lower in the second half, but fundamentally, if we look over a two-year period, we'll see those business kind of continue. I don't think we have a plan for it to jump though either. So I think – right now, I think with the visibility, particularly on the Sensing side, we're probably a little bit more prudent just to dial in what we think will happen without any extensive situation.
So as I mentioned before on the question, as we look at the guide, we see AHS probably being the best. If we think about on a two-year stack basis, AHS probably being better, iOS being better, and then PT being and maybe a little bit less than the other two. So I think that's the right way to be, but again, strength of the business and – we'll see how the remaining part of the year plays out relative to some of the economic situations that we – obviously we're tracking.
Great. Thank you.
Thanks, Julian.
Your next question comes from the line of Josh Pokrzywinski from Morgan Stanley. Your line is open.
Hey. Good afternoon, guys.
Hey, Josh.
Jim and Chuck, just relative to the full-year guide here 4% to 7%, obviously it's an easy comps along the way, and few aches and pains in terms of site access for some of the businesses, but isn't there any reason to believe that this is not with the new portfolio kind of the – within the steady state growth algorithm for the business as it stands today, given all the changes?
Well, I certainly think it's reasonable. We wouldn’t have put an unreasonable guide out there. And I think it's based on a couple of things. Number one is, I would say, again, this is where the – lot going on in 2020, as you mentioned, different regional comps and things like that. But I think as we looked at on a two-year stack, we continue to improve sequentially through the year without any unreasonable need for the economy to come back. But on the same token, we're still in a level of uncertainty here. We really don't know the exact date in which COVID will open up offices and get customers back up and fully running.
So I think when we look at it continuing to get better through the year, we make a bunch of our own lock like we did in 2020, where as you know, we were basically over 1% overall in the year. So I think we'll continue to make our own luck. And if things play out a little bit better economically than certainly fundamentally you'd probably see a bigger number, but I think for now with the level of uncertainty out there and the trajectory that we ended on, I think this is a strong guide.
Got it. That's helpful. And then just maybe if you wouldn't mind spending a moment on the M&A environment, obviously it's packed city out there, multiples are high. I think a lot of the things that maybe some of these emerging folks in the market are going off to look an awful lot like what could be afforded business, maybe it's the right multiple. How do you view the competition for assets or scarcity value for that matter, given that they're still maybe some reluctance to sell for better businesses who are still feeling COVID effects?
Yes. Great question, very timely, obviously. I think we've been very busy in the last six months, if I were to characterize our efforts. We certainly, I think continue to believe in the strength of our funnels. We've been active and looked at some things that quite frankly, we feel very disciplined and responsible relative to the environment. So I think – the real question is, are there opportunities out there for us? And we think that – we definitely think there are. We think there are great businesses that can become part of Fortive. We are active in the cultivation, despite the virtual nature of that. As you may have noted, we hired a new VP of Strategy that we announced on Monday.
So we're resourcing our capability. There's hardware and software opportunities. So I think the breadth of opportunities out there, but you have to – you're right, we have to be selective. We have to understand our markets. We have to be able to be in a position to understand and be where we can win and not have to pay unreasonable prices. And quite frankly, we've seen some things, transacted things we wouldn't do. But fundamentally I think if we think over the next 12 to 18 months, while M&A is unpredictable, I feel pretty confident we can put some cash to work that will bring in great businesses for Fortive.
Great. Thanks, Jim. Best of luck.
Thanks, Josh.
Your next question comes from the line of Richard Eastman from Baird. Your line is open.
Hi. Just a couple of quick questions, and thank you for your time. Just first of all, when I look at the full-year 2021 adjusted profit margin guide, the 22 to 23, if I look at it and break it down by business groups, it looks like maybe at the midpoint of some of these numbers that maybe we're looking for 50 basis point improvement at iOS and 50 at PT. The AHS business has about a 2 – if I'm doing the math right here about 200 basis points of margin improvement year-over-year. Is that mix or exiting the TSA or which is that just pure leverage if procedures come back?
Hey. Good evening, Rick. This is Chuck. I'll take that. The biggest issue is really exiting the TSA as we get into 2021. You get quite a step up there. Obviously, there's a lot of things going on that business with good position on margin, but I think what you're seeing is the TSA is rolling off.
Yes. And just as that business recovers, is that likely to be the highest adjusted operating profit margin business within Fortive or business group within Fortive if you go out a year or two?
I think that there's a room certainly to grow is elective procedures are down and that's some high margin business that we're missing right now. So we'll see it. But as you can see, we've got a – I think there's a three horse race here. So I won't bet against any one of our groups. But I do think there's good margin expansion at health for sure.
Rick, I would just add on the margin front. One of the things that's really important and maybe gets missed – isn't seen is, as we continue to add innovation and technology capability into the software businesses, part of that move to SaaS is a move of less services. And we were able to do installations at a lower cost. So if you look over the long-term, the margin profile on the software businesses, we get real leverage through the technology we work. And that's something that you'll necessarily maybe see in 2021, you'll see in some of the businesses. But I think over a long period of time, iOS is obviously an incredibly profitable segment, but the opportunity there to continue to do the work, apply FBS into our services business to make our applications easier for customers to install. Fundamentally, it’s a big margin opportunity as well.
Okay. And then just – maybe my last question just around pricing, how do you view pricing as we roll for 2021. And maybe what kind of net price capture do you suspect you'll get relative to some of the inflation we're seeing in electronics and other things?
Well, we had a very good year in price. As we noted on the call or in the prepared remarks, I think we had a good fourth quarter. We had a good year on price. We expect to have another good year on price. So I would say, first and foremost, we're probably in – for sure probably close to 100 basis points. We do not have a lot of – one of the things about sort of inflation is maybe something just to level set now with 40% recurring revenue in the portfolio. And most of that being software or very little material costs, we now have a big portion of our revenue profile that really doesn't have supply chain cost inflation pressure.
So the portfolio is really shifted in that regard. So while – we see some of the supply chain stuff, maybe a little bit on the freight side. But I think fundamentally we've done a great job over the years of really pushing on that. And then while at the same time, really looking for the price opportunities for what we call price realization from an FBS perspective through a combination of innovation and better commercial practices. So on the backs of a very good 2020, we expect to have another good year in 2021.
On the price side. Okay, great. Thank you.
Thanks, Rick.
Your next question comes from the line of Jeff Sprague from Vertical Research. Your line is open.
Thank you. Good evening, everyone. Hope you're doing well.
Hey, Jeff.
Hey, just to pick up a little bit on the M&A topic and kind of leverage it, I guess, no pun intended over to thinking about the balance sheet. You adjust in any way your view of kind of a comfort level on financial leverage here. Where are you comfortable to go in this environment and any other perspective there would be interesting?
Good evening, Jeff. This is Chuck. Yes, I don't think our view on leverage has changed. I think that what we've been talking about is that we deploy our free cash flow as you go through time. But like you saw us do in 2019, we'll stretch, take it up even up over 3.5. But then we'll work to bring it back down. We feel very comfortable anything under 2x net leverage. But I think that what you'll see is, what you've seen over the last few years, there'll be periods where we will elevate, but then you'll see us take steps to delever.
And unrelated, just kind of channel dynamics, I think on Fluke, you said, I think, mid-teens growth in China, but high single-digit POS. Are you seeing kind of significant channel fill, refill and other businesses or other markets? Was that a significant part of the topline equation here in the fourth quarter?
Yes. Jeff, no, it was not. I think as you know, we do a good job where we have our principal channel businesses being Fluke and Tek. We had good sales out. In most regions of the world, we get good inventory levels. No precipitous change really on the inventory side, inventories have been low and really nothing from a macro perspective that would suggest we've seen any inventory build of any magnitude. Some of the China dynamic is on the point of sales side versus the revenue side is a little bit, you typically see a little bit of a difference in China in the fourth quarter as people sort of get prepared for the Chinese New Year. And so it is an unusual for us to out gain a few basis points of point of sale in the fourth quarter. That's not an unusual situation. But I think as we look at where we're at right now, as we said sort of the end of January, we're in a pretty good shape relatively on a global basis relative to channel inventory.
Great. I'm sorry, can I sneak one more in, just on Advanced Health Care. It almost doesn't seem mathematically possible that core OMX would only be up 50 bps, if ASP was up 300 bps. Is there just some oddity in the way you're kind of accounting for the TSAs or something there in that description?
Yes. So we have really strong margin performance at ASP. But it was offset by – as I mentioned, Invetech grew 50% in the quarter and they are lower margin business. As I mentioned, the design and engineering part of that is a more of a people business. So it doesn't have the same margin profile. So it's really a mix issue. If we really look at kind of the core ongoing margin profile of the business, which has made up of mostly ASP and Fluke Health, we’re in a very good shape in the fourth quarter and we're going to exit well. As Chuck mentioned, some of the TSA fall off plus a lot of the good integration work we've done at ASP, we'll have a good 2021 in AHS. But a 50% growth rate in one quarter in a business does tend to mix it down a little bit.
Sure. Thanks for the color. Have a good night.
Yes, you too. Thanks, Jeff.
Your next question comes from the line of Scott Davis from Melius Research. Your line is open.
Good afternoon, guys.
Hey, Scott.
Jim, you mentioned – can you guys hear me okay?
Yes, we can.
Okay, good. Sorry. Jim, you mentioned the new hire, I think his name is Read Simmons. Can you just – it seems like kind of – he has a pretty darn good resume. What's the mandate? What are you looking for and why weren't you able to fill that seat internally?
Well, I think a couple of things. We had filled the seat internally for awhile and we decided that. I think as we continue, Scott, I sort of think of it this way. And you know we have a 10-year plan. We just updated the Board over the next five years. We've got a lot of skills around the things we've done over the last five years, but as we think forward, having somebody with Read’s resume who understands software, who understands the continuous improvement tools of software, as well as private equity. That's a combination of skills. Quite frankly, we have – that is really a great opportunity. And from time-to-time, we're going to look outside to supplement and compliment the great team we have. And this was a very unique situation where we have an opportunity to do that.
Yes. It seems so. And kind of that spirit, I mean, is there any meaningful change to R&D spend, CapEx, anything growth related that – now that we're kind of on our way to being post-COVID at least you can play a little bit more offense?
Well, I would say – Chuck can talk about the CapEx side. I think in general, the answer is, yes. I mean, our R&D spend has gone up a little bit as we come have more software businesses, which tend to have a little bit more R&D. We're investing a lot more into the Fort. We actually invested a lot last year, but we're doubling down in that, in our data analytics and machine learning as we noted in the commentary. We've talked about the ehsAI acquisition, which is really an Aqua hire, very little revenue, but really – just a really smart group of data scientists who can help accelerate our EH&S work. So I think those are good. That's a situation where we're really just hiring a big R&D team and a great capability in leadership.
So I think those – a number of those investments, we talked about our Pioneer Square Labs. We've doubled down in that. So yes, there is a number of places where we are playing offense. You saw some of that – you heard some of that in the fourth quarter, right? Some of the hardware Sonic Imager, the scopes of Tek, but also things like – at Accruent we had – we launched our latest analytics product with maintenance connected Accruent. So a number of places where we're playing offense, and we feel pretty good about how we can drive that in 2021, as you said, as we start to see sort of COVID start to slowdown here hopefully.
And Scott, I’d just add, with the post-separation of Vontier, two things. One is, we'll be pushing 7% R&D up from maybe – closer to 6%. So that's reflecting with Jim's comments as well. And then on CapEx, I think, we've always been pretty CapEx light, but as the – our software businesses become 10% of the total, you're going to expect to see that. The CapEx certainly not go up here and we'll remain CapEx light going forward, and maybe even start to trend down a little bit.
Hopeful. Thank you. Good luck guys.
Thanks Scott.
Your next question comes from the line of Andy Kaplowitz from Citigroup. Your line is open.
Good afternoon, guys.
Hi, Andy.
Jim, maybe you could give us a little more color in how you're thinking about the rate of recovery at Gordian and Accruent, you've talked for a couple of quarters now about constraints then local spend, but also that these businesses should be relatively solid going forward to focus on workplace space, buildings management. So how much visibility do you have in these kinds of businesses for better performance in 2021?
Well, yes. I mean, we definitely think the businesses are going to get better in 2021. We saw a couple of good evidence points in Q4. I mentioned the SaaS growth at double-digits. That was a good sign. We won twice as many logos in Q4 as we did in Q3. So I think those are really good signs for how we entered the year. We do need customer access to do some things. But we do have some wonderful opportunities. As you mentioned, we talked about the EMS space planning win, we're thinking – we have a number of applications that we'll be launching around employee experience. So a number – as companies start to think about bringing teams back to the office for periods of time.
So I think we've got a number of things that will help us make our own luck. But we do need to see some of that office access. So I think you'll see the business progressively get better through the year. On Gordian, Gordian has been in great shape, they were growing double-digit before COVID really been a really strong performer for us. We have some visibility into how things are changing at this point. As I mentioned in the prepared remarks around job order contracting, we start to see the projects get loaded, even though they might not be purchasing through the system yet. So that's starting to improve. I suspect we see that improve and as state and local budgets start to get approved into the second half of the year, we would expect to see things continuing.
If you think about the second half of the year, it's logical to think that state and local offices are going to start to want to bring people back and they're going to need to change the workplace. We're not about new buildings. We're about changing the buildings you have, changing the structures you have. And I think a number of those things are going to start to characterize themselves as we get further into the year. So I think that's the visibility we have and we feel good about the work, the teams – our teams are doing to put them in place for success.
Thanks for that. And then I'm curious about your semiconductor business within Sensing. There's obviously a lot of [indiscernible] still out there, geopolitical global semiconductor shortage. It looks like you're still seeing good growth there. So maybe talk about that business for 2021, if you could?
Yes. It's pretty much with OEM. We call it semiconductor, but it's mostly semiconductor equipment manufacturers. And that business has turned pretty well. So we think it's good for at least another quarter or two. So right now that's about the visibility we have. So I think that's probably where we stand right now. You didn't ask it, but we saw good growth at Keithley on the semiconductor side as well at Tektronix. I think some of that was pent-up demand that we saw, but it would be logical to think that as supply chain issues occur and some more money may get spent there that would be some benefit, but we haven't dialed that into our forecast at the point.
Thanks, Jim.
Thanks, Andy.
Your next question comes from the line of Andrew Obin from Bank of America. Your line is open.
Hi. Good afternoon.
Hey, Andrew.
Yes. So just a question on Tektronix, you highlighted I think some sort of trade related issues in China and just want to understand what are the trade restrictions for Tektronix in China? And do you expect them to be a drag for the rest of the year? And then just given what's happened and give me your exposure to the Tek segment in China? How do you grow in China from sort of the reset-based demand?
Well, I think first of all, we had about $2 million worth of Huawei in there. So I think, first, if you step back, we call that out because it's an impact to Tektronix in China. But in the big scheme of things relative to Fortive, these aren't big impact. I think the last of the Huawei impact as an example was a couple million bucks in Tek in the quarter. We do have some additional restrictions around military end use that we're seeing. But again, maybe a little bit of headwind for Tek, but not a major issue for the rest of the company not impactful relative to the overall Fortive.
But in terms of transparency and giving you a color on what we're seeing, the good news is, as we said in the prepared remarks, as we continue to see point of sale in good place, and we also saw good demand among medium – small and medium customers. So Chuck and I did try to review this a couple of weeks ago, and we're really pleased with the work that China's team – the Tek China’s team has done to extend themselves more with digital. And they're just doing a great job of really doing – expanding into new customer sets, which I think is going to bode well for us in the future.
And just a question on software and also question on SaaS, what was overall software growth all in for 2020 and what's your SaaS ARR at this point?
So I'm thinking here, our SaaS growth in the year was probably close to high-single digits, probably, maybe – yes. So I think that's probably right. I don't have an ARR number for the year, so we can get back to you on that. I think what we saw relative to overall software was probably a little down because of the low-to-mid single digits, we’re looking through the year just based on the services issues.
In terms of performance, Censis and Intelex led the way in terms of growth. They grew through the year as well as eMaint. So we had good growth in those places. The places where we saw maybe a little bit greater impact relative to some of the services was at Gordian and Accruent. So hopefully that gives you a little color and we can get back to you on the overall ARR number.
But in Accruent, just to follow-up on Andrew’s question, I mean, there is just few sort of site budget and education and state budget. I mean, the funding for, I think education and state budgets are in good shape. So that actually given what has already happened until 2021 that should actually improve right?
Yes, for sure. I think when you look at the situation of what educational – and this is mostly higher education by the way, higher education and state local buildings inevitably when they bring people back to the office, they're fundamentally going to have to change the social distancing and make changes to the facilities. And fundamentally that's the core part of what we see in Gordian. So in that case – and then from a facilities management space planning, that's also in the wheelhouse of Accruent. So we should see those things come back for sure. Again, don't can't pick the particular date, but I think if I were to make a bet, it's going to get better through every quarter of the year.
Fantastic. Thank you so much.
Thanks, Andrew.
Your next question comes from the line of Deane Dray from RBC Capital Markets. Your line is open.
Thank you. Good afternoon, everyone.
Good afternoon, Deane.
Like to stay right on that topic where Andrew left off. On the software side where you've had site access issues and not being able to provide onsite services, would there be a catch-up or will any of those services be lost?
It's a very temporary or – I think it's a temporary situation. So by nature of that, we probably see a catch-up, whether that's a catch-up in the year and in people, there's also – part of this is people reevaluating budgets a little bit. So we sort of classify all of that as a delay, but I think we're practical in the sense that maybe some of that is customers reassessing how many seats they want, how many licenses they want on the licensed software side. But we've seen a little bit of that compression. So I would expect there'll be a little bit of that, but to the broader question, Deane, I would expect there will be a catch-up at some point in the year. It maybe – as things get back, what I would call back to normal.
Got it. And what's the mix look like now? Is it like two-third SaaS, one-third transactional? And how do you expect that to evolve?
Yes. Deane, that's about right. Two thirds to maybe 70%, is at SaaS.
Okay. And then just a quick question or clarification on ASP. So the high-teens growth in China, I would imagine that there was a benefit there where more elective procedures have started. But is that 93% elective procedure you cite, is that a global number and what does that look like in China?
Yes, it's a global number. It's probably a – it's not at a 100% yet in China. We think about the fourth quarter. But it's moving up. I would say part of our China growth as well was equipment. We've been doing well on the equipment side. So I think as we look across – and quite frankly, across the board, maybe stepping back at ASP, we did an excellent job in equipment sales in the year. We're going to start with a bigger installed base than we did for a year ago. And obviously that bodes well for when consumables come back. So to your specific question, it was a combination of – it was also a big improvement in services. One of the things that we really been doing Deane in China was that we – when we first bought the business and we were lucky that this was the business that we took control of early.
One of the things we noticed was that the service revenue was a lower percentage of our sales in China than it was anywhere else in the world. So we applied a number of FBS tools, including policy deployment to make service revenue a big push for us in the business. And we've really, really increased the percent, the stickiness or the connection rate with our equipment and increased service contracts with current customers. So the growth was very much a story of not only electives coming back, but also equipment and the big story was service.
That was real helpful. Thank you.
Thank you.
Thanks, Deane.
Your next question comes from the line of Amit Daryanani from Evercore. Your line is open.
Thanks a lot for taking my question. I have two as well. I guess, first off on the M&A discussion, and I'd love to understand given the one tier sale and the addition to your dev team, is the focus going to be just to bolster the software, the recruiting business across the three segments? Or is there a desire to sort of add a fourth leg to the stool? And I don't know if the stool has four legs, but a fourth leg to the Fortive portfolio if you may. Are you going to think about those dynamics?
I think we're incredibly plus right now to be in an area where all three segments, I think have incredible opportunities. I mentioned, the $30-plus billion were the served market. We've just completed our next five-year – our update to our 10-year plan that we did five years ago with the Board. And we feel very excited and really, I think I would say that – if I were a betting person, I would say, most of our capital deployed in the current segments is probably the winning bet. We have a lot of opportunity. We see the breadth and depth within both hardware, software and services within all three. So I think when I really think about, I'd never say never because you never know when an opportunity becomes available. But I think the focus – we're blessed with the focus that we have and I think we're going to take advantage of that as we move forward.
Got it. And then if I could just ask you, when you just talked about the impact from COVID to calendar 2020, you've talked about the revenue impact on elective surgery and site access side, and you also have operational impact from there. Is there a way to think about how much revenues you may have left on the table this year? And how much cost you had to take on because of COVID? And then how do those two numbers stack up in calendar 2021?
Well, I don't know if I could put a revenue number to it. But if I think about us being – maybe the easy thing to do would be to say if we were down 6% core in the year and we should be – well, this portfolio can grow mid-single digits. You can apply that number to our total portfolio and say over 12 to 24-month period, you think that that would come back over time. That's a big number, but I would expect that some of it is that. So I think that's first and foremost. I'll let Chuck talk about some of the costs coming back.
But I think maybe the point too is, there's also – COVID has been a challenge for the year for all of us, everybody on this call, but it's also created a number of opportunities. Particularly in our – whether it's the focus more on EH&S, that every company in the world, and we have an outstanding portfolio of the EH&S businesses and now the continued increase and people wanting to focus on sustainability or the facilities management challenges that come with bringing people back to the office and to manufacturing sites and the importance of data as it relates to workers and those things. All of those speak to all the solutions that we've made part of Fortive over the last four years.
So I think we also have to think about when we get into what I'll call a normal environment, that fundamentally there's going to be tremendous opportunity for us to harness around a number of these new challenges that we're all going to have to deal with as business leaders. And we have the solutions to ultimately deal with – help them deal with those challenges. So I think – and that doesn't even talk about the sterilization and infection control challenges that hospitals are thinking about as well, and the solutions we have on the AHS side. So I think when you add that in, you'll come up with some pretty big numbers of opportunity.
Yes. And really quick on the cost, I think what we saw last year, so we took some costs out and it's coming back in and we've rebalanced it and we’re operating to a margin idea. But in the COVID environment going forward, there's going to be some incremental cost associated with that. But I think what we've seen in 2021, more opportunities to be more efficient, not having to go beyond sight all the time and things around travel. And I think there's more opportunity for us to create more leverage that way in total. There'll be puts and takes there as we go forward.
Perfect. Thanks a lot for your time.
Thank you.
Your next question comes from the line of John Walsh from Credit Suisse. Your line is open.
Hi. Good afternoon, everyone.
Hey, John.
So maybe going back to the SaaS business, I'm curious if you've seen any discernible change in kind of the growth that's coming from the retention and churn side of the equation versus maybe the upselling and normal kind of price escalators you have there. Any change in what's driving the growth?
Well, I think this is been – I mean, we don't talk a lot about it, but to have net retention over a 100, when customers are reevaluating things and looking for cost reductions, I think is an outstanding effort on the part of our commercial teams. So we've seen – we've not seen customer churn. We may have seen maybe people wanting to reduce their spend or something like that. But we've been able to maintain a lot of that, keep that net retention number over a 100 and I think that's – we have a number of FBS tools that are in – and quite frankly, data analytics solutions that we apply to those types of things to predict what are the characteristics of a customer that might potentially churn.
So I think John, we've done a good work to mitigate some of that. I think in a normal year, you think that our net retention might be a – would be higher than that number. So I think that's a little bit of a – little bit less upselling and maybe in this environment maybe a slight little bit of churn, depends on the business. Several of our businesses have actually decreased churn. Accruent is an example. So I think that's the environment we come into this year. And from here, I think we’re definitely through the toughest days in that regard.
Got it. And then maybe just one on the tax rate and kind of the sustainability of that going forward?
Yes. Thanks, John. What we put in here is the tax rate 14% going forward, that reflects our businesses as it is and the tax rules as we understand them going forward. What we haven't done is try to factor in any potential changes around the Biden administration might do. I would expect that those would changes if and when they come would be 2022. But they do something and we’ll of course, react to that.
So right now, we think that if nothing changed, which never happens by the way, but this would be the right rate. So we're going to watch very carefully about what gets proposed and understand the impact. Keep in mind with the acquisitions we've done, we've got a really global footprint, which gives us maybe more opportunities for maintaining an advantage in tax going forward, but we'll have to see what they do.
Great. Appreciate you taking the questions. Thank you.
Thank you.
Your final question comes from the line of Joe Giordano from Cowen. Your line is open.
Hey, guys. Thank you for fitting me in here.
Hi, Joe.
Hey. You kind of stole my question on tax there, but yes, hopefully you're accruing a nice bonus for your taxes and you're doing a heck of a job. But do you feel like there's almost like somewhat some sort of a target on a new administration for a company, like set up this way? Like a lot of the U.S. company that has significant declines in tax rate or is it something like you feel like is pretty defensible?
Well, we think it's very defensible and what we are doing is interpreting the tax laws as written. And what gives us maybe an advantage over some other companies is one, post-separation, we've got a high R&D tax and investment or R&D investment. And that gives us an advantage in the R&D tax credit. And also, as you do acquisitions in foreign countries, it just creates a fact pattern that we're just following the tax line as it's written. But those are kind of two big factors, especially the ASP acquisition, in Europe a few years back that that what helps us out quite a bit.
And then last for me, core OMX in the quarter [indiscernible] on the lightest revenue there. So like, was there some kind of like one-offs there that allowed that kind of magnitude on a comp thing mostly, or how do we think about that?
It's the volume coming back. So I think that's first and foremost. We see a business like Fluke coming back. That's the high margin business. You saw 280 basis points of core OMX in iOS. It's the strength of the SaaS growth in the software businesses, but it was across the board. So iOS certainly led the pack. As you know on a quarterly basis, there's always one segment that leads the pack a little bit more than the others. But I think what we saw was the breadth of OMX. And I think as we sit here looking into 2021, the 50 basis points that we grew OMX despite all the issues in 2020 gives us tremendous confidence that we can continue to do that in 2021.
And the only thing Joe I’d add to that is the – this is what can happen when you beat the top-end of your range with a high-50 gross margins. It's a happy problem now.
Thanks guys.
Thank you.
That concludes Q&A. I’d like to turn the call back to management for closing remarks.
Well, thanks everyone for today. We appreciate your time. We went a little over, but we knew we had a few – a little bit longer prepared remarks, so glad we could get to everyone. Thanks so much for your support this year, in 2020 and certainly into 2021. We're all hoping you're safe and healthy and look forward to hopefully seeing everybody in person sometime this year. Until then we'll take all your questions by phone and virtually look forward to seeing you there and have a great day. And obviously Griffin and team are available for questions. Thanks, everyone. Have a great night.
That concludes today's conference call. You may now disconnect.