Business Overview and History

Veralto Corporation (VLTO) is a global leader in essential water and product quality solutions, dedicated to Safeguarding the World's Most Vital Resources. With a diverse group of over 16,000 associates and a presence in more than 45 countries, Veralto has established a track record of consistent performance, profitable growth, and strategic investments for the future.

Veralto Corporation was formed in 2023 when it separated from Danaher Corporation, its former parent company. The company's origins can be traced back over two decades when Danaher began acquiring and integrating various industrial and technology companies that would eventually form Veralto's core businesses. Prior to the separation, Veralto's businesses were part of certain Danaher operating units.

Veralto has a long history of innovation, developing industry-leading products and solutions across its Water Quality (WQ) and Product Quality Innovation (PQI) segments. Some of Veralto's well-known global brands include Hach, Trojan Technologies, ChemTreat, Videojet, Linx, Esko, X-Rite, and Pantone. Over the years, Veralto has completed approximately 80 acquisitions to enhance its product capabilities and expand into new attractive markets.

The company's acquisition strategy, combined with its focus on continuous improvement through the Veralto Enterprise System (VES), has enabled Veralto to establish leading market positions and a reputation for innovation and customer trust. Prior to the separation, Veralto operated as part of Danaher and not as a standalone company. Accordingly, certain shared costs for management and support functions were allocated to Veralto and reflected as expenses in the carve-out financial statements.

Following the separation in 2023, Veralto began operating as an independent public company, taking on the associated costs and responsibilities. The transition to operating as a standalone public company presented both challenges and opportunities for Veralto as it continued to execute its strategies for growth and value creation.

The WQ segment provides precision instrumentation, consumables, software, services, and advanced water treatment technologies to help measure, analyze, and treat the world's water in municipal, industrial, commercial, residential, research, and natural resource applications. Key product lines in this segment include analytical instrumentation that measures and analyzes water quality parameters such as pH, dissolved oxygen, and conductivity, as well as chemical treatment solutions for improving water quality and system performance.

The PQI segment offers instruments, consumables, software, and services for various marking and coding, traceability, printing, packaging design and quality management, packaging converting, and color and appearance management applications for consumer packaged goods and industrial products. Key product lines in this segment include marking and coding products for printing expiration dates, lot codes, logos, and other information on products and packaging, as well as packaging and color solutions for packaging design, quality inspection, and color and appearance measurement.

Veralto's strong market positions, large installed bases, and intimate customer relationships have resulted in a high level of recurring revenue, which accounted for approximately 61% of total sales during the nine-month period ended September 27, 2024. This, combined with the company's broad service networks and focus on continuous improvement through the Veralto Enterprise System (VES), has helped insulate Veralto from economic cycles and enabled it to deliver consistent financial performance.

Financial Performance and Metrics

For the nine-month period ended September 27, 2024, Veralto reported total revenue of $3.85 billion, up 3.1% year-over-year. This growth was driven by a 3.4% increase in core sales, which excludes the impact of acquisitions, divestitures, and currency exchange rates. The company's adjusted operating profit margin expanded by 50 basis points to 23.4% during this period, reflecting the benefits of pricing actions, improved productivity, and cost optimization initiatives.

In the most recent fiscal year (2023), Veralto reported revenue of $5.02 billion, net income of $839 million, operating cash flow of $963 million, and free cash flow of $909 million.

For the most recent quarter (Q3 2024), Veralto reported revenue of $1.31 billion, net income of $219 million, operating cash flow of $224 million, and free cash flow of $215 million. Year-over-year revenue growth was 4.7%, driven by core sales growth of 4.6%, with pricing contributing 1.8% and volume contributing 2.8%.

Financials and Liquidity

Veralto's balance sheet remains strong, with a net debt position of $1.37 billion and a net leverage ratio of 1.1x as of September 27, 2024. The company's free cash flow generation has been robust, with a conversion rate of 98% of GAAP net income during the third quarter of 2024.

As of September 27, 2024, Veralto reported cash and cash equivalents of $1.27 billion. The company has a $1.5 billion revolving credit facility, which was undrawn as of the same date. Veralto's debt-to-equity ratio stands at 1.35, while its current ratio is 2.13 and quick ratio is 1.87, indicating a strong liquidity position.

Segment Performance

During the three and nine-month periods ended September 27, 2024, the Water Quality segment saw sales growth of 3.6% and 3.1% respectively compared to the prior year periods. Core sales growth was 4.0% and 3.6% for the three and nine-month periods. The segment's operating profit margin was 24.3% and 24.2% for the three and nine-month periods, respectively.

For the Product Quality Innovation segment, sales growth was 6.3% and 3.1% for the three and nine-month periods ended September 27, 2024, respectively. Core sales growth was 5.7% and 3.1% for the three and nine-month periods. The segment's operating profit margin was 26.7% and 26.6% for the three and nine-month periods, respectively.

Geographic Performance

Veralto operates globally, with approximately 44% of sales in North America, 22% in Western Europe, and 27% in high-growth markets (including Latin America and Asia excluding Japan, Australia, and New Zealand). In Q3 2024, North America saw core sales growth of 5.5%, Western Europe saw core sales growth of 4.2%, and high-growth markets saw core sales growth of 4.5%.

Recent Developments and Outlook

In the third quarter of 2024, Veralto delivered strong financial results, with 4.6% core sales growth and a 170-basis-point expansion in adjusted operating profit margin to 24.1%. The company's performance was driven by broad-based growth across key end markets and regions, including continued strength in industrial water treatment in North America and a gradual recovery in consumer packaged goods markets globally.

Early in the fourth quarter, Veralto announced the acquisition of TraceGains, a leading provider of cloud-based software solutions that enable connected data and digital workflow management to help consumer brands meet increasingly stringent compliance and reporting regulations for food and beverage safety and traceability. This acquisition aligns with Veralto's commitment to safeguarding the world's most vital resources and is expected to strengthen the company's PQI segment by enhancing its digital workflow capabilities for consumer packaged goods customers.

Looking ahead, Veralto expects core sales growth in the low to mid-single-digit range for the fourth quarter of 2024, consistent with the level of core growth reported in the second and third quarters. The company also raised its full-year 2024 adjusted earnings per share guidance to a range of $3.44 to $3.48, representing year-over-year growth of approximately 8% at the midpoint.

For Q4 2024, Veralto is targeting core sales growth in the low to mid-single-digit range on a year-over-year basis. The company expects acquisitions to contribute about 60 basis points to year-over-year sales growth in Q4 2024. Adjusted operating profit margin is expected to be approximately 24% in Q4 2024, representing a 30 basis point improvement year-over-year and flat sequentially. The Q4 2024 guidance for adjusted EPS is $0.86 to $0.90 per share.

The water treatment and product identification/coding markets that Veralto operates in are expected to grow at a CAGR of 5-7% over the next 5 years, driven by increasing regulations, sustainability initiatives, and digital transformation across Veralto's end markets.

Risks and Challenges

While Veralto has demonstrated resilience and consistent performance, the company faces various risks and challenges common to its industry, including:

1. Intense competition: Veralto operates in highly competitive markets, which could put pressure on pricing and margins. 2. Rapid technological change: The company's served markets are subject to rapid technological development, requiring significant investments in research and development to maintain a competitive edge. 3. Global economic and political uncertainties: Fluctuations in the global economy, trade policies, and geopolitical tensions could impact Veralto's operations and financial performance. 4. Regulatory environment: The company's businesses are subject to extensive regulations, and failure to comply could result in adverse consequences. 5. Acquisition and integration risks: Veralto's growth strategy relies on the successful identification, integration, and execution of strategic acquisitions, which carry inherent risks.

Conclusion

Veralto's diverse portfolio of globally recognized brands, strong market positions, and focus on continuous improvement have enabled the company to deliver consistent financial performance and position it well to capitalize on durable growth trends in its served markets. With a strong balance sheet, robust free cash flow generation, and a disciplined approach to capital allocation, Veralto appears well-equipped to navigate the challenges and uncertainties of the current environment while pursuing strategic initiatives to drive long-term shareholder value.