Fortive Corporation (FTV) FY2025 Earnings Quality Report

Grade: F — Post-Spin-Off Fortive Smaller, Leveraged, Goodwill-Heavy

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles

Data: SEC EDGAR 10-K (Filed 2026-02-25) + Yahoo Finance

Auditor: Ernst & Young LLP — Clean opinion

One-line verdict: Fortive's FY2025 results reflect a company that just got smaller — on June 28, 2025, Fortive completed the separation of its Precision Technologies segment by distributing all shares of Ralliant Corporation to Fortive shareholders. Continuing operations now cover just two segments — Intelligent Operating Solutions and Advanced Healthcare Solutions — with FY2025 continuing-operations revenue of $4.16B and operating income of $0.72B. The company reports strong underlying profitability (63.5% gross margin) but the post-spin balance sheet is the story: cash of $381M covers only 11% of total debt of $3.31B (C4 fail), and goodwill plus intangibles of $9.49B equals 147% of the post-spin equity base of $6.45B (D1 fail). Shareholders equity fell from $10.19B to $6.45B as Ralliant's net assets left the balance sheet. That leaves FTV carrying the old Fortive's goodwill on a much smaller capital base. No revenue-quality red flags, but the leverage math trips two of the four "critical" category codes and the M-Score at -2.69 is clean. The 10-K also flags that the February 20, 2026 Supreme Court IEEPA tariff ruling creates unresolved refund uncertainty for 2026.

The Numbers: Post-Spin, Focused Fortive

The MD&A explicitly discloses: "On June 28, 2025 (the 'Distribution Date'), the Company completed the separation (the 'Separation' or the 'PT Separation') of its former Precision Technologies segment by distributing to Fortive shareholders on a pro rata basis all of the issued and outstanding common stock of Ralliant Corporation ('Ralliant'), the entity incorporated to hold the PT businesses. The accounting requirements for reporting Ralliant as a discontinued operation were met when the Separation was completed. Accordingly, the accompanying consolidated financial statements for all periods presented reflect this business as a discontinued operation."

Note: the FY2022 numbers appear to include the full former Fortive (before the Ralliant separation recasting). FY2023-2025 reflect continuing operations. The apparent "decline" from $5.83B to $3.91B in 2023 is mostly the Ralliant PT segment being removed, not actual business contraction.

Post-spin, the two remaining segments are:

The MD&A describes Fortive as "a multinational business with global operations with approximately 44% of our sales derived from customers outside the United States in 2025."

FY2025 net income dropped 30% to $580M even as operating income held flat. The drop reflects discontinued operations accounting (Ralliant results no longer in continuing ops) and interest expense absorbing a larger share of the smaller company's earnings.

The Balance Sheet Post-Spin

The spin-off mechanically reduced Fortive's equity base. Before the separation, Fortive's shareholders equity at 12/31/2024 was $10.19B. After the June 2025 distribution of Ralliant, equity at 12/31/2025 was $6.45B — a $3.74B decrease that represents Ralliant's net assets moving off Fortive's books to Ralliant shareholders.

The goodwill stayed (goodwill typically gets allocated to the parent entity in a spin-off proportionally based on relative fair values), while equity shrunk by $3.74B. The result: goodwill+intangibles rose from 96% of equity (pre-spin) to 147% of equity (post-spin) — mechanically, not because FTV did anything, but because Ralliant took the equity but left the goodwill in proportions that shifted the ratio.

Cash Flow: Declining With the Smaller Perimeter

CFFO dropped from $1.53B to $1.08B — a 29% decline — which reflects the removal of Ralliant from continuing operations. FCF/NI at 1.87x remains healthy. The cash conversion is actually *better* on a ratio basis — just against a smaller baseline.

The 18-Point Screening

Revenue Quality

Note: A3 technically passes because the engine only fails when revenue growth exceeds 10% while CFFO declines. FTV's revenue grew only 1.9%, which is below that threshold. But the -29% CFFO decline is still notable — it reflects the disposition of Ralliant's cash flows more than operating deterioration.

Expense Quality

Gross margin of 63.5% is strong — it reflects the higher-margin software and healthcare focus of the post-spin business.

Cash Flow Quality

C4 is a red flag. Cash of $381M against $3.31B of total debt — 11% coverage. The $4.3B pre-spin cash position fell to $381M post-spin as Ralliant took some cash, FTV distributed dividends, and capital was returned to shareholders. Fortive is now running a much thinner cash cushion on a similar debt stack.

Balance Sheet Health

D1 is a red flag. Post-spin, goodwill of $7.30B plus intangibles of $2.19B totals $9.49B against equity of just $6.45B — 147%. This is structurally significant: if Fortive had to impair even 20% of the goodwill, it would effectively erase $1.9B of equity. The M&A-driven industrial software roll-up model has now reached a ratio where the intangible asset base is larger than the net book equity.

D3 shows other assets down 91.6% — this is a mechanical effect of Ralliant's assets leaving the balance sheet, not real operational change.

Acquisition Risk

Beneish M-Score: -2.69 (Clean)

Comfortably below the -2.22 threshold. No manipulation signal. The clean M-Score indicates the operating business is not showing the statistical patterns associated with earnings management.

Altman Z-Score: 2.85 (Grey Zone)

Z-Score of 2.85 sits just below the 2.90 safe threshold — in the upper reaches of the grey zone. The primary drag: the heavy goodwill inflated asset base relative to equity reduces the "retained earnings/total assets" and "working capital/total assets" component ratios.

Key Risks from the 10-K

1. Macroeconomic and Trade Policy Exposure

Item 1A: "Conditions in the global economy, the markets we serve, and the financial markets may adversely affect our business and financial results. Our business is impacted by general economic conditions, and adverse economic conditions arising from any slower global economic growth, reduced demand or consumer confidence, energy, manufacturing or component supply constraints arising from international conflicts, high inflation rates and the corresponding interest rate policies, volatility in currency and credit markets… changes in global trade policies, unemployment and underemployment rates, immigration policies, reduced levels of capital expenditures… affect us and our distributors, customers, and suppliers."

2. IEEPA Tariff Ruling and One Big Beautiful Bill Act (OBBBA)

The MD&A discloses unusual forward-looking risk items: "Our financial outlook is subject to various assumptions and risks, including but not limited to: ongoing geopolitical events… reduction in U.S. government spending due to H.R.1, also known as the One Big Beautiful Bill Act ( OBBBA )… our financial outlook is subject to the impact of the recent ruling by the Supreme Court of the United States invalidating certain tariffs previously imposed under the International Emergency Economic Powers Act ('the IEEPA Ruling'), including the impact on operational and transaction costs, any responsive legislative or executive action seeking to reimpose similar tariffs, our ability to seek and obtain refunds for previously paid tariffs that have been subsequently invalidated."

Translation: FTV does not know how much in tariff refunds it may recover, does not know whether Congress will pass replacement tariff legislation, and does not know how customers/suppliers will respond. This is genuinely uncertain guidance.

3. Goodwill Impairment Risk

The 147% goodwill/equity ratio is itself the risk. If Fortive's operating businesses underperform their internal forecasts, annual goodwill impairment testing could generate a writedown that would meaningfully reduce equity. This is not a fraud risk — it is a structural accounting risk that follows from the roll-up acquisition strategy.

4. Integration of Prior Acquisitions

Post-Ralliant spin, the remaining Fortive is still the product of many prior acquisitions. The 10-K's Item 1A includes standard language about the difficulty of integrating acquired businesses and realizing expected synergies.

5. Healthcare Segment Regulatory Risk

The Advanced Healthcare Solutions segment (sterilization, fluidics) serves regulated healthcare markets. Changes in FDA approval processes, Medicare/Medicaid reimbursement policies, or hospital capital spending directly impact this segment.

6. Currency and International Operations

With "approximately 44% of our sales derived from customers outside the United States," currency translation and hedging are material. The 10-K flags "foreign exchange rate volatility, including the impact of unhedged foreign currency debts" as a specific factor.

7. Interest Rate Exposure

Interest expense was $118M in 2025 against $830M of net income — a coverage ratio of 7x. Manageable today, but the 2.8x Debt/EBITDA is below investment-grade thresholds and Fortive has to refinance parts of its debt stack as it matures.

8. Smaller Scale Post-Spin

The post-spin Fortive is $4.16B of revenue rather than the ~$6-7B pre-spin. Smaller scale means less diversification, less SG&A leverage, and potentially less M&A firepower. The strategic logic of the spin (creating two focused pure-plays) makes sense, but the cost is lower diversification.

Summary

Fortive's FY2025 10-K describes a company that just completed the June 2025 Ralliant spin-off and is now operating as a smaller, more focused industrial software + healthcare company. Revenue of $4.16B, operating income of $0.72B, 63.5% gross margin — these are legitimately attractive unit economics.

The two red flags are mechanical consequences of the spin-off:

Things working: M-Score -2.69 (clean), no revenue-quality flags, strong 63.5% gross margin, CFFO/NI at 1.87x, no goodwill surge in 2025, Altman Z-Score at 2.85 just below safe threshold.

Things to watch: the 147% goodwill/equity ratio is a structural vulnerability — any future impairment would meaningfully damage book equity; the tariff refund uncertainty from the IEEPA ruling; potential OBBBA-related government spending cuts impacting customers; and the smaller scale post-spin reduces diversification.

Bottom line: Fortive's F grade in this framework reflects two mechanical balance-sheet fails from the post-spin reshape, not accounting quality concerns. The continuing operations business is high-margin and cash-generative. Investors who understood the Ralliant separation thesis will view this as a normal consequence of the transaction; a strict quality screen flagging goodwill concentration and thin cash cushion will not pass it.

**Disclaimer**: This report is based on Fortive Corporation's FY2025 10-K (SEC EDGAR) and public financial data. It uses forensic accounting screening frameworks (Schilit's *Financial Shenanigans*, Beneish M-Score, Altman Z-Score) for red flag detection. This is NOT investment advice. Screening for red flags does not constitute a buy or sell recommendation. Past financial performance does not predict future results. Always do your own research and consult a qualified financial advisor.

**About EarningsGrade**: We screen earnings reports to help investors identify financial red flags. Our approach: "Screen out, not screen in." A passing grade means no red flags were detected — it does not mean the stock is a good investment.