Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide material information relevant to an assessment of the Company’s financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. The MD&A is designed to focus specifically on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management’s assessment to have a material impact on future operations. The Company’s MD&A is divided into seven sections:

Information Relating to Forward-Looking Statements;
Basis of Presentation;
Overview;
Results of Operations;
Financial Instruments and Risk Management;
Liquidity and Capital Resources; and
Critical Accounting Estimates.

You should read this discussion along with the Company’s MD&A and audited financial statements and Notes thereto as of and for the year ended December 31, 2022, included within the Information Statement filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K with the SEC on October 2, 2023 (the “Information Statement”) and related Notes as of and for the three and nine-month periods ended September 29, 2023 included in this Quarterly Report on Form 10-Q (“Report”).

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

Certain statements included or incorporated by reference in this Report, in other documents we file with or furnish to the Securities and Exchange Commission, in our press releases, webcasts, conference calls, materials delivered to shareholders and other communications, are “forward-looking statements” within the meaning of the U.S. federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: projections of revenue, expenses, profit, profit margins, pricing, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions and the integration thereof, divestitures, spin-offs, split-offs, initial public offerings, other securities offerings, or other distributions, strategic opportunities, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; future regulatory approvals and the timing and conditionality thereof; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; future foreign currency exchange rates and fluctuations in those rates; the potential or anticipated direct or indirect impact of COVID-19 on our business, results of operations and/or financial condition; general economic and capital markets conditions; the anticipated timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that Veralto intends or believes will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words.

Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors. Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Important factors that in some cases have affected us in the past and that in the future could cause actual results to differ materially from those envisaged in the forward-looking statements include the following:

Business and Strategic Risks

The COVID-19 pandemic has adversely impacted and could in the future continue to adversely impact elements of our business and financial statements. Other conditions in the global economy, including military conflicts, the particular markets we serve and the financial markets can also adversely affect our business and financial statements.
We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce the prices we charge.
Our growth depends on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation. Our growth can also suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality.

Acquisitions, Divestitures and Investment Risks

Any inability to consummate acquisitions at our historical rate and appropriate prices, and to make appropriate investments that support our long-term strategy, could negatively impact our business.
Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we or our predecessors have previously disposed could adversely affect our business and financial statements.

Operational Risks

Significant disruptions in, or breaches in security of, our information technology (“IT”) systems or data; data privacy violations; other losses or disruptions to facilities, supply chains, distribution systems or IT systems due to catastrophe; and labor disputes can all adversely affect our business and financial statements.
Defects and unanticipated use or inadequate disclosure with respect to our products or services, or allegations thereof, can adversely affect our business and financial statements.
Our success depends on our ability to recruit, retain and motivate talented employees representing diverse backgrounds, experiences and skill sets.

Intellectual Property Risks

If we are unable to adequately protect our intellectual property, or if third-parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights. These risks are particularly pronounced in countries in which we do business that do not have levels of protection of intellectual property comparable to the United States.

Financial and Tax Risks

We may be required to recognize impairment charges for our goodwill and other intangible assets. Changes in tax law relating to multinational corporations could adversely affect our tax position.
Foreign currency exchange rates can adversely affect our financial statements. Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our earnings. In addition, audits by tax authorities could result in additional tax payments for prior periods.
Our defined benefit pension plans and health care costs are subject to financial and other market risks that could adversely affect our financial statements.

Legal, Regulatory, Compliance and Reputational Risks

Our businesses are subject to extensive regulation, failure to comply with those regulations could adversely affect our business and financial statements. Significant developments or changes in national laws or policies to protect or promote domestic interests and/or address foreign competition can have an adverse effect on our business and financial statements.
We are subject to or otherwise responsible for a variety of litigation and other legal and regulatory proceedings in the course of our business that can adversely affect our business and financial statements.

Separation and Our Relationship with Danaher Risks

Veralto has no history of operating as a separate, publicly traded company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of its future results.
In connection with Veralto’s separation from Danaher, Danaher has agreed to indemnify Veralto for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure Veralto against the full amount of such liabilities, or that Danaher’s ability to satisfy its indemnification obligation will not be impaired in the future.
If there is a determination that the separation and/or the distribution, together with certain related transactions, is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying IRS private letter ruling and/or any tax opinion are incorrect or for any other reason, then Danaher and its stockholders could incur significant U.S. federal income tax liabilities, and we could also incur significant liabilities.
Veralto may be affected by significant restrictions, including on its ability to engage in certain corporate transactions for a two-year period after the distribution in order to avoid triggering significant tax-related liabilities.
After the distribution, certain of Veralto’s executive officers and directors may have actual or potential conflicts of interest because of their equity interest in Danaher. Also, certain of Danaher’s current directors and a current Danaher officer and a current Danaher employee have joined Veralto’s Board, which may create conflicts of interest or the appearance of conflicts of interest.
Veralto may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect Veralto’s businesses.
We had outstanding indebtedness at the closing of the distribution of approximately $2.6 billion and the ability to incur an additional $1.5 billion of indebtedness under a revolving credit agreement, and in the future we may incur additional indebtedness. This indebtedness, and Veralto’s ability to generate sufficient cash to service such indebtedness, could adversely affect our businesses and our ability to meet our obligations and pay dividends.

Common Stock Risks

Veralto cannot be certain that an active trading market for its common stock will develop or be sustained after the separation, and following the separation, the price of Veralto common stock may fluctuate significantly, which could cause the value of your investment to decline. Your percentage ownership in Veralto may be diluted in the future.
The obligations associated with being a public company, including the implementation and maintenance of effective controls over financial reporting, will require significant resources and management attention. If we are unable to implement and maintain such controls, investors may lose confidence in the accuracy and completeness of Veralto’s financial reports and the market price of Veralto common stock may be negatively affected.
Veralto cannot guarantee the payment of dividends on its common stock, or the timing or amount of any such dividends.
Certain provisions in Veralto’s amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of Veralto, which could decrease the trading price of Veralto’s common stock.
Forum selection provisions included in our governing documents could discourage lawsuits against Veralto and Veralto’s directors, officers, employees and stockholders.

See “Risk Factors” in the Information Statement for further discussion regarding reasons that actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Forward-looking statements speak only as of the date of the report, document, press release, webcast, call, materials or other communication in which they are made. Except to the extent required by applicable law, we do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.

BASIS OF PRESENTATION

The accompanying Combined Financial Statements present the historical financial position, results of operations, changes in Danaher’s equity and cash flows of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the preparation of carved-out Combined Financial Statements.

The Company has historically operated as part of Danaher and not as a stand-alone company. The financial statements have been derived from Danaher’s historical accounting records and are presented on a carve-out basis. All revenues and costs, as well as assets and liabilities, directly associated with the business activity of the Company are included as a component of the financial statements. The financial statements also include allocations of certain general, administrative, and sales and marketing expenses from Danaher’s corporate office and from other Danaher businesses to the Company. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company been an entity that operated independently of Danaher. Related party allocations, including the method for such allocation, are discussed further in Note 14 to the accompanying Combined Condensed Financial Statements for the three and nine months ended September 29, 2023.

The Company’s business consists of two segments: Water Quality and Product Quality & Innovation. For additional details regarding these businesses, please refer to the section titled “Business” included within the Information Statement.

Until the Separation, the Company was dependent upon Danaher for all of its working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. Because the Company was part of Danaher for the three and nine months ended September 29, 2023, only cash, cash equivalents and borrowings clearly associated with Veralto and related to the Separation, including the financing transactions described in the “Liquidity and Capital Resources” section, have been included in these Combined Condensed Financial Statements. Other financial transactions relating to the business operations of the Company during the period were accounted for through the Net Parent investment account of the Company.

OVERVIEW

Business Overview

The Company’s unifying purpose is Safeguarding the World’s Most Vital ResourcesTM. Our diverse group of associates and leading operating companies provide essential technology solutions that monitor, enhance and protect key resources around the globe. The Company is committed to the advancement of public health and safety and believes it is positioned to support its customers as they address large global challenges including environmental resource sustainability, water scarcity, management

of severe weather events, food and pharmaceutical security, and the impact of an aging workforce. For decades, the Company has used its scientific expertise and innovative technologies to address complex challenges our customers face across regulated industries – including municipal utilities, food and beverage, pharmaceutical and industrials – where the consequence of failure is high. Through its core offerings in water analytics, water treatment, marking and coding, and packaging and color, customers look to the Company’s solutions to help ensure the safety, quality, efficiency, and reliability of their products, processes, and people globally. The Company is headquartered in Waltham, Massachusetts with a workforce of approximately 16,000 associates strategically located in more than 45 countries.

As a result of the Company’s geographic and industry diversity, the Company faces a variety of opportunities and challenges, including rapid technological development in most of the Company’s served markets, the expansion and evolution of opportunities in high-growth markets, trends and costs associated with a global labor force, consolidation of the Company’s competitors and increasing regulation. The Company operates in a highly competitive business environment in most markets, and the Company’s long-term growth and profitability will depend in particular on its ability to identify, consummate and integrate appropriate acquisitions and identify and consummate appropriate investments and strategic partnerships, develop innovative and differentiated new products and services with higher gross profit margins, expand and improve the effectiveness of the Company’s sales force, continue to reduce costs and improve operating efficiency and quality, effectively address the demands of an increasingly regulated global environment and expand its business in high-growth geographies and high-growth market segments. The Company is making significant investments, organically and through acquisitions and investments, to address the rapid pace of technological change in its served markets and to globalize its manufacturing, research and development and customer-facing resources (particularly in high-growth markets) to be responsive to the Company’s customers throughout the world and improve the efficiency of the Company’s operations. The Company defines high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure which encompass all markets outside of the developed markets and consist of Eastern Europe, the Middle East, Africa, Latin America (including Mexico) and Asia (with the exception of Japan, Australia and New Zealand). The Company defines developed markets as all markets of the world that are not high-growth markets.

The Company operates through two segments – Water Quality (“WQ”) and Product Quality & Innovation (“PQI”). The Company’s businesses within these segments have strong globally recognized brands as a result of its leadership in served markets over several decades. Through WQ, the Company improves the quality and reliability of water through leading brands including Hach, Trojan Technologies and ChemTreat. Through PQI, the Company promotes consumer trust in products and help enable product innovation through leading brands including Videojet, Linx, Esko, X-Rite and Pantone. The Company believes its leading positions result from the strength of our commercial organizations, our legacy of innovation, and our close and long-term connectivity to its customers and knowledge of their workflows, underpinned by our culture of continuous improvement. This has resulted in a large installed base of instruments that drive ongoing consumables and software sales to support the Company’s customers. As a result, the Company’s business generates recurring sales which represented approximately 59% of total sales during the nine-month period ended September 29, 2023. The Company’s business model also supports a strong margin profile with limited capital expenditure requirements and has generated attractive cash flows. The Company believes these attributes allow it to deliver financial performance that is resilient across economic cycles.

We also believe that Veralto’s history with the Danaher Business System (“DBS”) provides the Company with a strong foundation for competitive differentiation. DBS is a business management system that consists of a philosophy, processes and tools that guide what Danaher does and measure how well Danaher executes, grounded in a culture of continuous improvement. The DBS processes and tools are organized around the areas of Lean, Growth and Leadership, and are rooted in foundational tools known as the DBS Fundamentals, which are relevant to every associate and business function. The DBS Fundamentals are focused on core competencies such as using visual representations of processes to identify inefficiencies, defining and solving problems in a structured way, and continuously improving processes to drive consistent execution.

Members of the team that serve as Veralto management have served as Danaher leaders and have been integral to the evolution of DBS. For example, Veralto’s President and Chief Executive Officer has practiced and championed DBS in multiple operating companies across multiple geographies and industries since 1999 and has contributed meaningfully to the evolution of DBS over that period. Veralto’s Senior Vice President, Water Quality previously led the Danaher Business System Office, which bears central responsibility for stewardship of the DBS processes and tools and development of DBS practitioners who support the operating companies and train business leaders in the application of DBS. Many of the other Danaher associates who became Veralto senior leaders have years of experience practicing DBS and deploying it in their particular businesses and functions.

Danaher licenses to Veralto the DBS tools and processes as they existed at the Separation. Veralto uses and evolves those tools and processes as the Veralto Enterprise System (“VES”). We use VES tools to improve our profitability and cash flows, which support our ability to expand our addressable market and improve our market position through investments in areas such as our commercial organization and research and development (“R&D”), including software and digital solutions. Our cash flows also

support acquisitions to enhance our product capabilities and expansion into new and attractive markets, which we have successfully done through the acquisition of approximately 80 businesses over more than two decades.

Business Performance

During the third quarter of 2023, the Company’s overall revenues increased 3.0% compared to the comparable period of 2022. Core sales increased 1.0% in the third quarter of 2023 compared to the prior year period primarily driven by core sales in the Water Quality segment. Acquisitions, net of divestitures contributed 0.5% to the increase in sales and the impact of currency exchange rates increased reported sales by 1.5%. For the nine-month period ended September 29, 2023, overall revenues and core sales increased 3.0%. Acquisitions, net of divestitures contributed 0.5% to the increase in sales and the impact of currency exchange rates decreased reported sales by 0.5%. For the definition of “core sales” refer to “—Results of Operations” below.

Geographically, the Company’s sales in the three-month period ended September 29, 2023 in developed markets increased year-over-year by 6.0% driven by increased sales of 3.5% in North America and 12.5% in Western Europe while high-growth markets decreased by 4.5%, primarily driven by over 20% sales declines in China due to lower demand. For the same period, core sales in developed markets increased 3.5% driven by an increase in core sales of 3.5% in North America and 2.5% in Western Europe while core sales in high-growth markets decreased 5.0% driven principally by lower core sales in China.

Geographically, the Company’s sales in the nine-month period ended September 29, 2023 in developed markets increased year-over-year by 4.5% driven by increased sales of 4.0% in North America and 7.0% in Western Europe while sales in the high-growth markets declined 1.0%, due to low teens percentage sales declines in China partially offset by growth in the majority of other countries within the high-growth markets. For the same period, core sales in developed markets increased 4.0% driven by an increase in core sales of 4.0% in North America and 4.0% in Western Europe, while core sales in high-growth markets were essentially flat as a high single digits percentage core sales decline in China was offset by core sales increases across other high-growth market countries.

The Company’s net earnings for the three and nine-month periods ended September 29, 2023 totaled $205 million and $639 million, respectively, compared to $218 million and $629 million, respectively, for the three and nine-month periods ended September 30, 2022. The decrease in net earnings for the three-month period ended September 29, 2023 compared to the three-month period ended September 30, 2022 was driven by lower operating profit as a result of increased operating expenses as the Company prepared to operate as a stand-alone company. The increase in net earnings during the nine-month period ended September 29, 2023 as compared to the comparable period in 2022 was driven by increased revenues partially offset by higher operating expenses during the nine-month period ended September 29, 2023 as compared to the comparable period in 2022. Refer to “—Results of Operations” for further discussion of the year-over-year changes in net earnings for the three and nine-month periods ended September 29, 2023.

Outlook

For the fourth quarter 2023, we anticipate weakness in demand for consumer-packaged goods to impact year-over-year core sales in the Product Quality and Innovation segment and broad weakness in China to impact year-over-year core sales in both the Water Quality and Product Quality and Innovation segments.

The Company has access to capital resources and continues to focus on profitability improvements and leveraging VES to manage the anticipated impact of the challenging macroeconomic environment on our business operations.

Our outlook for 2023 reflects our current visibility and expectations based on current market factors. Our ability to meet our expectations are subject to numerous risks, including, but not limited to, those described in Item 1A – Risk Factors within our Information Statement and those updated in Item 1A – Risk Factors within this Report.

The COVID-19 Pandemic

Overall, while conditions related to the COVID-19 pandemic generally have improved in 2023 compared to 2022 (including the announcement on April 10, 2023 that the U.S. public health emergency related to COVID-19 ended), conditions vary by geography. We continue to assess the impact of any potential disruption on all aspects of our business, as well as our ability to execute our business strategies and objectives.

For additional information on the risks of COVID-19 to the Company’s operations, refer to the section titled “Risk Factors” included within the Information Statement.

Public Company Expenses

As a result of the separation, the Company is subject to the Sarbanes-Oxley Act and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company is now required to have additional procedures and practices as a separate public company. As a result, the Company has incurred and will continue to incur additional personnel and corporate governance costs, including internal and external audit, investor relations, stock administration and regulatory compliance costs.

RESULTS OF OPERATIONS

Non-GAAP Measures

In this report, references to the non-GAAP measures of core sales (also referred to as core revenues or sales/revenues from existing businesses) refer to sales from continuing operations calculated according to GAAP but excluding sales from acquired businesses (as defined below) and the impact of currency translation.

References to sales or operating profit attributable to acquisitions or acquired businesses refer to sales or operating profit, as applicable, from acquired businesses recorded prior to the first anniversary of the acquisition less any sales and operating profit, during the applicable period, attributable to divested product lines not considered discontinued operations. The portion of revenue attributable to currency translation is calculated as the difference between the period-to-period change in revenue (excluding sales from acquired businesses (as defined above, as applicable)) and the period-to-period change in revenue (excluding sales from acquired businesses (as defined above, as applicable)) after applying current period foreign exchange rates to the prior year period.

Core sales growth should be considered in addition to, and not as a replacement for or superior to, sales growth, and may not be comparable to similarly titled measures reported by other companies. Management believes that reporting the non-GAAP financial measure of core sales growth provides useful information to investors by helping identify underlying growth trends in the Company’s business and facilitating comparisons of the Company’s revenue performance with its performance in prior and future periods and to the Company’s peers. Management also uses core sales growth to measure the Company’s operating and financial performance and as one of the performance measures in the Company’s short-term incentive compensation program. The Company excludes the effect of currency translation from core sales because currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends, and excludes the effect of acquisitions and divestiture-related items because the nature, size, timing and number of acquisitions and divestitures can vary dramatically from period-to-period and between the Company and its peers, and can also obscure underlying business trends and make comparisons of long-term performance difficult.

Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information calculated in accordance with U.S. GAAP. Investors are encouraged to review the reconciliation of each non-GAAP financial measure to its most directly comparable U.S. GAAP financial measure.

Sales Growth and Core Sales Growth


	% Change Three-Month Period Ended September 29, 2023 vs. Comparable 2022 Period		% Change Nine-Month Period Ended September 29, 2023 vs. Comparable 2022 Period
Total sales growth GAAP	3.0	%	3.0	%
Impact of:
Acquisitions/divestitures	(0.5)	%	(0.5)	%
Currency exchange rates	(1.5)	%	0.5	%
Core sales growth (non-GAAP)	1.0	%	3.0	%

2023 Sales Compared to 2022

Total sales increased 3.0% during the three and nine-month periods ended September 29, 2023 compared to the three and nine-month periods ended September 30, 2022, respectively, primarily as a result of the increase in core sales due to the factors discussed below by segment. The impact of acquisitions increased reported sales 0.5% on a year-over-year basis during the three and nine-month periods ended September 29, 2023. The impact of currency translation increased reported sales 1.5% on a year-over-year basis during the three-month period ended September 29, 2023 and decreased reported sales 0.5% on a year-over-year basis during the nine-month period ended September 29, 2023. Price increases contributed 3.5% and 4.5% to sales growth on a year-over-year basis during the three and nine-month periods ended September 29, 2023, respectively, and are reflected as a component of core sales growth above.

Operating Profit Performance

Operating profit margins decreased 160 basis points from 23.4% during the three-month period ended September 30, 2022 to 21.8% for the three-month period ended September 29, 2023.

Third quarter 2023 vs. third quarter 2022 operating profit margin comparisons were unfavorably impacted by:

The changes in the Company’s operational and administrative cost structure, net of the impact of higher third quarter 2023 core sales and product mix - 120 basis points
Third quarter 2023 impairment charges related to a trade name in the Product Quality and Innovation segment - 50 basis points

Third quarter 2023 vs. third quarter 2022 operating profit margin comparisons were favorably impacted by:

The incremental net accretive effect in 2023 of acquired businesses - 10 basis points

Operating profit margins increased 30 basis points from 22.6% during the nine-month period ended September 30, 2022 to 22.9% for the nine-month period end September 29, 2023.

Year-to-date 2023 vs. Year-to-date 2022 operating profit margin comparisons were favorably impacted by:

Higher 2023 core sales, net of the impact of product mix, impact of foreign exchange rates and changes in the Company’s operational and administrative cost structure - 25 basis points
The incremental net accretive effect in 2023 of acquired businesses - 10 basis points
Third quarter year-to-date 2022 impairments of accounts receivable and inventory - 5 basis points

Year-to-date 2023 vs. Year-to-date 2022 operating profit margin comparisons were unfavorably impacted by:

Third quarter year-to-date 2023 impairment charge related to customer relationships and a trade name in the Product Quality and Innovation segment, net of third quarter year-to-date 2022 impairment charge related to technology and customer relationships in the Water Quality segment - 10 basis points

Business Segments

Sales by business segment for each of the periods indicated were as follows ($ in millions):


	Three-Month Period Ended				Nine-Month Period Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Water Quality	$	772	$	741	$	2,257	$	2,131
Product Quality & Innovation	483		478		1,476		1,491
Total	$	1,255	$	1,219	$	3,733	$	3,622

For information regarding the Company’s sales by geographical region, refer to Note 3 to the accompanying Combined Condensed Financial Statements.

WATER QUALITY

The Company’s Water Quality segment provides proprietary precision instrumentation, consumables, software, services and advanced water treatment technologies to help measure, analyze and treat the world’s water in residential, commercial, municipal, industrial, research and natural resource applications.

Water Quality Selected Financial Data


	Three-Month Period Ended						Nine-Month Period Ended
($ in millions)	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Sales	$	772		$	741		$	2,257		$	2,131
Operating profit	188			185			536			485
Depreciation	6			6			18			19
Amortization of intangible assets	5			4			15			16
Operating profit as a % of sales	24.4		%	25.0		%	23.7		%	22.8		%
Depreciation as a % of sales	0.8		%	0.8		%	0.8		%	0.9		%
Amortization as a % of sales	0.6		%	0.5		%	0.7		%	0.8		%

Sales Growth and Core Sales Growth


	% Change Three-Month Period Ended September 29, 2023 vs. Comparable 2022 Period		% Change Nine-Month Period Ended September 29, 2023 vs. Comparable 2022 Period
Total sales growth GAAP	4.0	%	6.0	%
Impact of:

Currency exchange rates	(1.0)	%	—	%
Core sales growth (non-GAAP)	3.0	%	6.0	%

Total segment sales increased 4.0% and 6.0% during the three and nine-month periods, primarily as a result of core sales growth driven by the factors discussed below. Additionally, currency exchange rates increased reported sales 1.0% for the three-month period ended September 29, 2023 and had no impact on reported sales for the nine-month period ended September 29, 2023. Geographically, sales growth was driven by North America and Western Europe, which increased 6.0% and 13.0%, for the three-month period and 7.0% and 8.5% for the nine-month period. The high-growth markets decreased 5.5% for the three-month period and increased 2.0% for the nine-month period.

Price increases in the segment contributed 5.0% and 6.0% to sales growth on a year-over-year basis during the three and nine-month periods ended September 29, 2023, respectively, and are reflected as a component of the change in core sales growth.

Core sales in the Water Quality segment increased at 3.0% and 6.0% year-over-year during the three and nine-month periods ended September 29, 2023 compared to the comparable period of 2022. Geographically, core sales growth was driven by North America and Western Europe, which increased 6.0% and 5.5%, respectively, for the three-month period and 7.0% in both regions for the nine-month period. For the three-month period ended September 29, 2023, core sales in the high-growth markets decreased 6.5%, driven by high teens percentage core sales declines in China partially offset by growth in other countries within the high-growth markets. For the nine-month period ended September 29, 2023, core sales in the high-growth markets increased 3.5%, driven by majority of countries within the high-growth markets partially offset by high single digit percentage core sales declines in China. The increase in core sales in the three-month period was driven by the chemical treatment solutions product line and, to a lesser extent, the ultraviolet water disinfection and the analytical instrumentation product lines. The increase in core sales in the nine-month period was driven by the analytical instrumentation product line and the chemical treatment solution product line. Year-over-year core sales in the analytical instrumentation product line increased 0.5% and 5.0%, for the three and nine-month periods, respectively, driven by the developed markets offset by declines in China. Core sales in the business’ chemical treatment solutions product line increased 5.5% and 9.0% year-over-year for the three and nine-month periods, respectively, as a result of increased core sales across most major end-markets. Core sales in the ultraviolet water disinfection product line increased by 11.0% and 5.0% in the three and nine-month periods, respectively, driven by demand in the municipal and residential end-markets.

Operating Profit Performance

Operating profit margins decreased 60 basis points during the three-month period ended September 29, 2023 as compared to the comparable period of 2022. Year-over-year operating profit margin comparisons were unfavorably impacted by incremental costs associated with labor and sales and marketing growth initiatives, net of higher third quarter 2023 core sales and incremental year-over-year cost savings associated with material costs - 60 basis points

Operating profit margins increased 90 basis points during the nine-month period ended September 29, 2023 as compared to the comparable period of 2022.

Year-to-date 2023 vs. Year-to-date 2022 operating profit margin comparisons were favorably impacted by:

Higher year-to-date third quarter 2023 core sales and incremental year-over-year cost savings associated with material costs, net of the impact of product mix and incremental year-over-year costs associated with labor and sales and marketing growth initiatives - 50 basis points
Second quarter 2022 impairment charges related to technology and customer relationships - 40 basis points

PRODUCT QUALITY & INNOVATION

The Company’s Product Quality & Innovation segment provides instruments, software, services and consumables for various color and appearance management, packaging design and quality management, packaging converting, printing, marking and coding, and traceability applications for consumer, pharmaceutical and industrial products.

Product Quality & Innovation Selected Financial Data


	Three-Month Period Ended						Nine-Month Period Ended
($ in millions)	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Sales	$	483		$	478		$	1,476		$	1,491
Operating profit	99			109			356			364
Depreciation	3			4			11			12
Amortization of intangible assets	7			7			21			22
Operating profit as a % of sales	20.5		%	22.8		%	24.1		%	24.4		%
Depreciation as a % of sales	0.6		%	0.8		%	0.7		%	0.8		%
Amortization as a % of sales	1.4		%	1.5		%	1.4		%	1.5		%

Sales Growth (Decline) and Core Sales Decline


	% Change Three-Month Period Ended September 29, 2023 vs. Comparable 2022 Period		% Change Nine-Month Period Ended September 29, 2023 vs. Comparable 2022 Period
Total sales growth (decline) GAAP	1.0	%	(1.0)	%
Impact of:
Acquisitions/divestitures	(1.0)	%	(1.0)	%
Currency exchange rates	(2.5)	%	0.5	%
Core sales decline (non-GAAP)	(2.5)	%	(1.5)	%

Total segment sales increased 1.0% and decreased 1.0% during the three and nine-month periods ended September 29, 2023, primarily as a result of changes in core sales driven by the factors discussed below. Additionally, currency exchange rates increased reported sales 2.5% for the three-month period and decreased reported sales 0.5% for the nine-month period. Acquisitions, net of divestitures increased reported sales by 1.0% for both the three and nine-month periods ended September 29, 2023. Geographically, sales declined 2.5% in North America and 3.0% in the high-growth markets, partially offset by an increase of 12.0% in Western Europe during the three-month period. Sales decreased 2.5% in North America and 4.0% in the high-growth markets, partially offset by an increase of 5.5% in Western Europe during the nine-month period ended September 29, 2023, as compared to the comparable period of 2022.

Price increases in the segment contributed 2.0% to sales growth on a year-over-year basis during the three and nine-month periods ended September 29, 2023, respectively, and are reflected as a component of the change in core sales growth.

Core sales in the Product Quality & Innovation segment decreased 2.5% and 1.5% during the three and nine-month periods ended September 29, 2023, as compared to the comparable period of 2022. Geographically, the year-over-year decrease in core sales was driven by a decrease of 2.5% in North America for the three and nine-month periods, and declines of 3.0% in the high-growth markets for both the three and nine-month periods. The decrease in core sales in the high-growth markets was driven by over 20% and low double digit percentage core sales declines in China for three and nine-month periods, respectively. The decrease in Product Quality & Innovation segment core sales was partially offset by an increase of 1.5% in Western Europe for the nine-month period and by increases of 8.0% and 4.5% in Latin America for the three and nine-month periods, respectively. From a product line perspective, the decrease in core sales in the segment during the three-month period was primarily driven by the packaging and color solutions business where core sales decreased 7.0% driven by reduced capital spending across the consumer packaged goods and industrial end-markets. Core sales in the segment decreased 1.5% during the nine-month period primarily driven by the marking and coding business where core sales decreased 1.5% due to lower demand in the industrial and consumer packaged goods end-markets as well as the packaging and color solutions business where core sales decreased 2.0%.

Operating Profit Performance

Operating profit margins decreased 230 basis points during the three-month period ended September 29, 2023 as compared to the comparable period of 2022.

Third quarter 2023 vs. third quarter 2022 operating profit margin comparisons were unfavorably impacted by:

The impact of product mix and volume, foreign exchange rates and incremental year-over-year costs associated with material, and labor and sales and marketing growth initiatives - 130 basis points
Third quarter 2023 impairment charges related to a trade name - 130 basis points

Third quarter 2023 vs. third quarter 2022 operating profit margin comparisons were favorably impacted by:

The incremental net accretive effect in 2023 of acquired businesses - 30 basis points

Operating profit margins decreased 30 basis points during the nine-month period ended September 29, 2023 as compared to the comparable period of 2022.

Year-to-date 2023 vs. year-to-date 2022 operating profit margin comparisons were unfavorably impacted by:

Third quarter year-to-date 2023 impairment charge related to customer relationships and a trade name - 80 basis points

Year-to-date 2023 vs. year-to-date 2022 operating profit margin comparisons were favorably impacted by:

The incremental net accretive effect in 2023 of acquired businesses - 25 basis points
Incremental year-over-year cost savings associated with restructuring and continuing productivity improvement initiatives, net of lower third quarter year-to-date 2023 core sales, the impact of product mix, foreign exchange rates and incremental year-over-year costs associated with material and labor and sales and marketing growth initiatives - 15 basis points
Third quarter year-to-date 2022 impairments of accounts receivable and inventory in Russia - 10 basis points

COST OF SALES AND GROSS PROFIT


	Three-Month Period Ended						Nine-Month Period Ended
($ in millions)	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Sales	$	1,255		$	1,219		$	3,733		$	3,622
Cost of sales	(532)			(525)			(1,578)			(1,573)
Gross profit	$	723		$	694		$	2,155		$	2,049
Gross profit margin	57.6		%	56.9		%	57.7		%	56.6		%

Cost of sales increased by $7 million and $5 million or 1.3% and 0.3% during the three and nine-month periods ended September 29, 2023, as compared to the comparable periods of 2022, due primarily to the impact of higher year-over-year labor costs and impacts from foreign currency exchange rates offset by lower material costs.

Gross profit margins increased 70 basis points and 110 basis points on a year-over-year basis for the three and nine-month periods ended September 29, 2023, as compared to the comparable period of 2022. Gross profit margins were impacted by positive pricing actions discussed above and to a lesser extent lower material costs, partially offset by the impacts from foreign currency exchange rates.

OPERATING EXPENSES


	Three-Month Period Ended						Nine-Month Period Ended
($ in millions)	September 29, 2023			September 30, 2022			September 29, 2023			September 30, 2022
Sales	$	1,255		$	1,219		$	3,733		$	3,622
Selling, general and administrative (“SG&A”) expenses	(395)			(357)			(1,133)			(1,067)
Research and development (“R&D”) expenses	(55)			(52)			(168)			(164)

SG&A as a % of sales	31.5		%	29.3		%	30.4		%	29.5		%
R&D as a % of sales	4.4		%	4.3		%	4.5		%	4.5		%

SG&A expenses as a percentage of sales increased 220 basis points and 90 basis points for both the three and nine-month periods ended September 29, 2023, respectively, as compared to the comparable periods in 2022, driven primarily by the increase in the Company’s SG&A expenses exceeding the increase in the Company’s sales, resulting from the continued investments in sales and marketing growth initiatives, intangible asset impairments and increased labor costs as well as the costs to operate as a stand-alone company. Intangible asset impairment charges of $6 million in the three-month period ended September 29, 2023 increased SG&A expenses as a percentage of sales compared to the same period in 2022. Intangible asset impairment charges totaling $12 million in the nine-month period ended September 29, 2023, net of $9 million intangible asset impairment charges in the nine-month period ended September 30, 2022 increased SG&A expenses as a percentage of sales.

R&D expenses as a percentage of sales remained relatively consistent during the three and nine-month periods ended September 29, 2023 as compared to the comparable periods of 2022.

OTHER INCOME (EXPENSE), NET

For a description of the Company’s other income (expense), net during the three and nine-month periods ended September 29, 2023 and September 30, 2022, refer to Note 6 to the accompanying Combined Condensed Financial Statements.

INCOME TAXES

General

Income tax expense and deferred tax assets and liabilities reflect management’s assessment of future taxes expected to be paid on items reflected in the Company’s Combined Financial Statements. The Company records the tax effect of discrete items and items that are reported net of their tax effects in the period in which they occur.

In accordance with the tax matters agreement, Danaher is retaining certain net tax liabilities that are subject to joint and several liability between Danaher and the Company with respect to the taxable periods (or portions thereof) ended on or prior to September 29, 2023.

The Company’s effective tax rate can be affected by changes in the mix of earnings in countries with different statutory tax rates (including as a result of business acquisitions and dispositions), changes in the valuation of deferred tax assets and liabilities, and accruals related to contingent tax liabilities, the results of audits and examinations of previously filed tax returns (as discussed below), the expiration of statutes of limitations, the implementation of tax planning strategies, tax rulings, court decisions, settlements with tax authorities and changes in tax laws and regulations, and legislative policy changes (for example, any changes that may result from the OECD’s initiative on Base Erosion and Profit Shifting). For a description of the tax treatment of earnings that are planned to be reinvested indefinitely outside the United States, refer to “Liquidity and Capital Resources” below.

The following table summarizes the Company’s effective tax rate:


	Three-Month Period Ended				Nine-Month Period Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Effective tax rate	23.5	%	23.5	%	23.5	%	23.1	%

Year-Over-Year Changes in the Tax Provision and Effective Tax Rate

The Company operates globally, including in certain jurisdictions with higher statutory tax rates than the U.S. Therefore, based on earnings mix, the impact of operating in such jurisdictions contributes to a higher effective tax rate compared to the U.S. federal statutory tax rate.

The effective tax rate for the three-month period ended September 29, 2023 differs from the U.S. federal statutory rate of 21.0% principally due the geographic mix of earnings described above, partially offset by net discrete benefits of $6 million related primarily to excess tax benefits from stock-based compensation and changes in estimates associated with prior period uncertain tax positions. The net discrete benefits reduced the effective tax rate by 2.2% for the three-month period ended September 29, 2023.

The effective tax rate for the nine-month period ended September 29, 2023 differs from the U.S. federal statutory rate of 21.0% principally due the geographic mix of earnings described above, partially offset by net discrete benefits of $12 million related primarily to excess tax benefits from stock-based compensation. The net discrete benefits reduced the effective tax rate by 1.4% for the nine-month period ended September 29, 2023.

The effective tax rate for the three-month period ended September 30, 2022 differs from the U.S. federal statutory rate of 21.0% principally due to geographic mix of earnings described above, partially offset by net discrete benefits of $3 million related primarily to excess tax benefits from stock-based compensation and changes in estimates associated with prior period uncertain tax positions. These net discrete benefits reduced the effective tax rate by 1.1% for the three-month period ended September 30, 2022.

The effective tax rate for the nine-month period ended September 30, 2022 differs from the U.S. federal statutory rate of 21.0% principally due the geographic mix of earnings described above, partially offset by net discrete benefits of $11 million related primarily to excess tax benefits from stock-based compensation and changes in estimates associated with prior period uncertain tax positions. The net discrete benefits reduced the effective tax rate by 1.3% for the nine-month period ended September 30, 2022.

The Company conducts business globally and files numerous consolidated and separate income tax returns in the U.S. federal and state and non-U.S. jurisdictions. The non-U.S. countries in which the Company has a significant presence include Belgium, Brazil, Canada, China, Germany, Netherlands and the United Kingdom. Excluding these jurisdictions, the Company believes that a change in the statutory tax rate of any individual non-U.S. country would not have a material effect on the Company’s Combined Financial Statements given the geographic dispersion of the Company’s taxable income.

The amount of taxes the Company pays is subject to ongoing audits by federal, state and foreign tax authorities, which often result in proposed assessments. Management performs a comprehensive review of its global tax positions on a quarterly basis. Based on these reviews, the results of discussions and resolutions of matters with certain tax authorities, tax rulings and court decisions and the expiration of statutes of limitations, reserves for contingent tax liabilities are accrued or adjusted, as necessary. For a discussion of risks related to these and other tax matters, refer to “Risk Factors” in the Information Statement.

COMPREHENSIVE INCOME

In 2023, comprehensive income increased $25 million for the three-month period ended September 29, 2023 primarily driven by decreased losses from foreign currency translation adjustments, partially offset by lower net earnings in the year-over-year period. Comprehensive income increased $190 million for the nine-month period ended September 29, 2023 as compared to the comparable periods of 2022, primarily driven by decreased losses from foreign currency translation adjustments and to a lesser extent higher net earnings in the year-over-year period. The Company recorded foreign currency translation losses of $62 million for the three-month period ended September 29, 2023, primarily driven by the strengthening of the U.S. dollar against the euro, Canadian dollar, and British pound, compared to losses of $97 million for the three-month period ended September 30, 2022, primarily driven by the strengthening of the U.S. dollar against the euro, British pound, Canadian dollar and the Swiss franc in that period. The Company recorded foreign currency translation losses of $34 million for the nine-month period ended September 29, 2023, primarily driven by the strengthening of the U.S. dollar against the euro, Japanese yen, Chinese yuan and Canadian dollar in the period, compared to losses of $212 million for the nine-month period ended September 30, 2022, primarily driven by the strengthening of the U.S. dollar against the euro, British pound, Canadian dollar and the Swiss franc in that period. Foreign currency translation adjustments reflect the gain or loss resulting from the impact of the change in currency exchange rates on the Company’s foreign operations as they are translated to the Company’s reporting currency, the U.S. dollar.

LIQUIDITY AND CAPITAL RESOURCES

Before the Separation, the Company was dependent upon Danaher for all of its working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. Because the Company was part of Danaher during the three and nine-month periods ended September 29, 2023, only cash, cash equivalents and borrowings clearly associated with Veralto and related to the Separation, including the financing transactions described below, have been included in these Combined Condensed Financial Statements. Other financial transactions relating to the business operations of the Company during the period were accounted for through the Net Parent investment account of the Company.

As a result of the Separation, the Company no longer participates in Danaher’s cash management and financing operations. Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating and investing activities. The Company continues to generate substantial cash from operating activities and believes that its operating cash flow and other sources of liquidity will be sufficient to allow it to continue to invest in existing businesses, consummate strategic acquisitions, make interest payments on its outstanding indebtedness, and manage its capital structure on a short and long-term basis.

The cash balance presented on the Combined Condensed Balance Sheet as of September 29, 2023 of $426 million represents amounts clearly associated with Veralto related to the contribution of the Veralto businesses to the Company on September 29, 2023, as described above.

During the third quarter, the Company completed the following financing transactions:

Issued approximately $2.1 billion aggregate principal amount of senior unsecured notes in three series with maturity dates ranging from 2026 through 2033. Additionally, the Company issued €500 million principal amount of senior unsecured notes with a maturity date of 2031.
Entered into a credit agreement providing for a five-year unsecured revolving credit facility in an aggregate committed amount of $1.5 billion (the “Credit Facility”). There were no outstanding amounts under the Credit Facility as of September 29, 2023. The Credit Facility includes an alternative currency sublimit up to an amount equal to 90% of the aggregate commitments and a $100 million swingline sublimit and provides for the issuance of swing loans.

These financing activities yielded net proceeds of approximately $2.6 billion, of which approximately $2.6 billion was paid to Danaher in September 2023 as consideration for the contribution of assets to Veralto by Danaher in connection with the Separation. Refer to Note 9 of the Combined Condensed Financial Statements for more information related to the Company’s long-term indebtedness.

The Company intends to initiate a quarterly cash dividend of $0.09 per common share in arrears commencing following the quarter ending December 31, 2023, subject to approval by its Board of Directors with respect to each such dividend.

Overview of Cash Flows and Liquidity

Following is an overview of the Company’s cash flows and liquidity ($ in millions):


	Nine-Month Period Ended
($ in millions)	September 29, 2023		September 30, 2022
Net cash provided by operating activities	$	700	$	533

Cash paid for acquisitions	$	—	$	(51)
Payments for additions to property, plant and equipment	(32)		(26)
Proceeds from sales of property, plant and equipment	2		—
Net cash used in investing activities	$	(33)	$	(77)

Net proceeds from borrowings (maturities longer than 90 days)	$	2,608	$	—
Consideration paid to Parent in connection with Separation	(2,600)		—
Net transfers to Parent	(240)		(456)
Net cash used in financing activities	$	(232)	$	(456)

Operating cash flows increased $167 million, or 31%, during the nine-month period ended September 29, 2023 as compared to the comparable period of 2022, primarily due to favorable net working capital changes.
Net cash used in investing activities consisted primarily of capital expenditures and decreased year-over-year primarily as a result of no cash paid for acquisitions in the 2023 period compared to 2022.
Net cash used in financing activities decreased $224 million for the nine-month period September 29, 2023 as compared to the comparable period of 2022 as the Company returned less cash to the Parent. Additionally, the Company incurred approximately $2.6 billion of indebtedness as described above and more fully in Note 9 of the Combined Condensed Financial Statements, which was offset by a cash payment to Parent.

Contractual Obligations

For a description of the Company’s lease obligations, commitments and litigation and contingencies, refer to Notes 7, 11 and 12 to the audited Combined Financial Statements included within the Information Statement.

Cash and Cash Requirements

The Company will continue to have cash requirements to support general corporate purposes, which may include working capital needs, capital expenditures, acquisitions and investments, paying interest and servicing debt, paying taxes and any related interest or penalties, funding its restructuring activities and pension plans as required, paying dividends to shareholders and supporting other business needs.

The Company generally intends to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, the Company may also borrow under its commercial paper programs (if available) or borrow under the Company’s Credit Facility, enter into new credit facilities and either borrow directly thereunder or use such credit facilities to backstop additional borrowing capacity under its commercial paper programs (if available) and/or access the capital markets (if available). The Company also may from time to time seek to access the capital markets to take advantage of favorable interest rate environments or other market conditions.

Repatriation of some cash held outside the United States may be restricted by local laws. Following enactment of the Tax Cuts and Jobs Act and the associated Transition Tax, in general, repatriation of cash to the United States can be completed with no material incremental U.S. tax; however, repatriation of cash could subject the Company to non-U.S. taxes on distributions. The cash that the Company’s non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes, if any, applicable to such earnings including basis differences in our foreign subsidiaries are not readily determinable. As of September 29, 2023, management believes that it has sufficient sources of liquidity to satisfy its cash needs, including its cash needs in the United States.

During 2023, the Company’s cash contribution requirements for its pension plans are expected to be $5 million. The ultimate amounts to be contributed depend upon, among other things, legal requirements, underlying asset returns, the plan’s funded status, the anticipated tax deductibility of the contribution, local practices, market conditions, interest rates and other factors.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to the Company’s critical accounting estimates as described in our Information Statement.

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