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

64K characters. Original on sec.gov · Markdown

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 six sections:

Information Relating to Forward-Looking Statements;
Basis of Presentation;
Overview;
Results of Operations;
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, 2023, included within the 2023 Annual Report on Form 10-K, and the unaudited financial statements and related Notes as of and for the three and six-month periods ended June 28, 2024 included in this Quarterly Report on Form 10-Q (this “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; 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:

Conditions in the global economy, including military conflicts, the particular markets we serve and the financial markets can 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.
Global economic, political, legal, compliance, social and business factors can negatively affect our business and financial statements.
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.
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.
Our acquisition or divestiture of businesses, investments, joint ventures and other strategic relationships can negatively impact our business and financial statements.
Significant disruptions in, or breaches in security of, our information technology (“IT”) systems or data or violations of data privacy laws can 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.
If we suffer loss to our facilities, supply chains, distributions systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed.
Climate change, legal or regulatory measures to address climate change and any inability on our part to address stakeholder expectations related to climate change may negatively affect us.
Our financial results are subject to fluctuations in the cost and availability of the supplies that we use in, and the labor we need for, our operations.
Our success depends on our ability to recruit, retain and motivate talented employees representing diverse backgrounds, experiences and skill sets.
Our restructuring actions can have long-term adverse effects on our business and financial statements.
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.
Third parties from time to time claim that we are infringing or misappropriating their intellectual property rights and we could suffer from significant litigation expenses, losses or licensing expenses or be prevented from selling products or services.
Our outstanding debt has increased significantly as a result of our separation from Danaher, and we may incur additional debt in the future. Our existing and future indebtedness may limit our operations and our use of our cash flow and negatively impact our credit ratings; and any failure to comply with the covenants that apply to our indebtedness could adversely affect our business and financial statements.
We may be required to recognize impairment charges for our goodwill and other intangible assets.
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.
Changes in tax law relating to multinational corporations could adversely affect our tax position.
Our businesses are subject to extensive regulation, failure to comply with those regulations could adversely affect 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.
Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our business and financial statements.
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.
The forum selection provisions under Veralto’s amended and restated certificate of incorporation could discourage lawsuits against Veralto and Veralto’s directors, officers, employees and stockholders.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
As an independent, public traded company, Veralto may not enjoy the same benefits that Veralto did as a part of Danaher.
Potential indemnification liabilities to Danaher pursuant to the separation agreement could materially and adversely affect Veralto’s business and financial statements.
In connection with the Separation, 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, 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.
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.
Danaher may compete with Veralto.
Veralto or Danaher may fail to perform under various transaction agreements that were executed as part of the Separation or Veralto may fail to have necessary systems and services in place when certain of the transaction agreements expire.

See “Item 1A. Risk Factors” in the 2023 Annual Report on Form 10-K 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 Consolidated and Combined Condensed Financial Statements present the historical financial position of the Company, results of operations, changes in equity and cash flows in accordance with generally accepted accounting principles in the United States (“GAAP”). Prior to the Separation from Danaher on September 30, 2023, Veralto businesses were comprised of certain Danaher operating units. Veralto Corporation and the Veralto Businesses (including the periods prior to the Separation) are collectively referred to as “Veralto” or the “Company” herein.

The Combined Condensed Financial Statements for periods prior to the Separation were derived from Danaher’s Consolidated Condensed Financial Statements and accounting records and prepared in accordance with GAAP for the preparation of carved-out combined financial statements. Prior to the Separation, all revenues and costs as well as assets and liabilities directly associated with Veralto have been included in the Combined Condensed Financial Statements. Additionally, the Combined Condensed Financial Statements for periods prior to the Separation included allocations of certain general, administrative, sales and marketing expenses and cost of sales from Danaher’s corporate office and from other Danaher businesses to Veralto, and

allocations of related assets, liabilities, and the Former Parent’s investment, as applicable. The allocations were 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 Veralto been operating independently of Danaher during the applicable periods. Accordingly, the Combined Condensed Financial Statements may not be indicative of Veralto’s results had the Company been a separate stand-alone entity throughout the periods presented. For further discussion of related party allocations prior to the Separation, including the method for such allocation, refer to Note 18 of the 2023 Annual Report on Form 10-K.

Following the Separation, the Consolidated Condensed Financial Statements include the accounts of Veralto and those of its wholly-owned subsidiaries and no longer include any allocations from Danaher.

OVERVIEW

Business Overview

The Company’s unifying purpose is Safeguarding the World’s Most Vital ResourcesTM. Our diverse group of 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 and food and pharmaceutical security. 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 and processes. The Company is headquartered in Waltham, Massachusetts with a workforce of approximately 16,000 associates strategically located in more than 45 countries.

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 provides innovative products and services that improve the quality and reliability of water through leading brands including Hach, Trojan Technologies and ChemTreat. Through PQI, the Company enables customers to promote 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 61% of total sales during the six-month period ended June 28, 2024. 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.

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 include 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.

We also believe that the Veralto Enterprise System (“VES”) provides the Company with a strong foundation for competitive differentiation. VES is a business management system that consists of a philosophy, processes and tools that guide what

Veralto does and measure how well Veralto executes, grounded in a culture of continuous improvement. The VES processes and tools are organized around the areas of Operational Excellence, Growth and Leadership, and are rooted in foundational tools known as the VES Fundamentals, which are relevant to every associate and business function. The VES 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.

Veralto uses 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 three-month period ended June 28, 2024, the Company’s overall revenues increased 2.8% and core sales increased 3.8% compared to the comparable period in 2023 with growth in both segments. Currency exchange rates and acquisitions, net of divestitures, decreased reported sales by 0.8% and 0.2%, respectively. For the six-month period ended June 28, 2024, overall revenues increased 2.3% and core sales increased 2.8% compared to the comparable period in 2023. Currency exchange rates and acquisitions, net of divestitures, decreased reported sales by 0.3% and 0.2%, respectively. For the definition of “core sales” refer to “—Results of Operations” below.

Geographically, the Company’s sales in the three-month period ended June 28, 2024 in developed markets increased year-over-year by 3.5% driven by increased sales of 5.8% in North America, partially offset by decreased sales of 0.4% in Western Europe. Sales in high-growth markets increased 1.1% year-over-year. For the same period, core sales in developed markets increased 3.5% driven by an increase in core sales of 5.4% in North America. Core sales were flat in the three-month period ended June 28, 2024 in Western Europe. Core sales in high-growth markets increased 4.4% driven by high single-digit increases in Latin America.

Geographically, the Company’s sales in the six-month period ended June 28, 2024 in developed markets increased year-over-year by 3.3% driven by increased sales of 5.3% in North America and 0.4% in Western Europe while sales in high-growth markets decreased 0.4%. For the same period, core sales in developed markets increased 2.9% driven by an increase in core sales of 4.8% in North America, partially offset by decreased core sales of 0.5% in Western Europe, while core sales in high-growth markets increased 2.1% driven by mid-single digit increases in Latin America.

The Company’s net earnings for the three and six-month periods ended June 28, 2024 totaled $203 million and $387 million, respectively, compared to $209 million and $434 million, respectively, for the three and six-month periods ended June 30, 2023. The decrease in net earnings during the three-month period ended June 28, 2024 as compared to the three-month period ended June 30, 2023 was driven by standalone public company costs, interest expense post Separation from Danaher, and select investments in sales and marketing growth initiatives. The decrease in net earnings during the six-month period ended June 28, 2024 as compared to the six-month period ended June 30, 2023 was driven by standalone public company costs, interest expense post Separation from Danaher, select investments in sales and marketing growth initiatives and a loss on a sale of a product line. Refer to “—Results of Operations” for further discussion of the year-over-year changes in net earnings for the three and six-month periods ended June 28, 2024.

Outlook

Looking out over the balance of 2024, in the Water Quality Segment, the Company continues to expect positive secular growth drivers across industrial markets particularly in North America, along with steady demand at municipalities. In the Product Quality and Innovation segment, the Company expects to see steady, modest recovery in the consumer packaged goods markets as the year progresses. In any end market environment, the Company leverages VES to drive growth and continuous improvement.

The Company’s outlook for 2024 reflects its current visibility and expectations based on the current market environment and other factors. The Company’s ability to meet its expectations are subject to numerous risks, including, but not limited to, those described in “Item 1A. Risk Factors” within the Company’s 2023 Annual Report on Form 10-K and any subsequent updates in Item “1A. Risk Factors” within Quarterly Reports on Form 10-Q.

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 GAAP. Investors are encouraged to review the reconciliation of each non-GAAP financial measure to its most directly comparable GAAP financial measure.

Sales Growth and Core Sales Growth


	% Change Three-Month Period Ended June 28, 2024 vs. Comparable 2023 Period		% Change Six-Month Period Ended June 28, 2024 vs. Comparable 2023 Period
Total sales growth (GAAP)	2.8	%	2.3	%
Impact of:
Acquisitions/divestitures	0.2	%	0.2	%
Currency exchange rates	0.8	%	0.3	%
Core sales growth (non-GAAP)	3.8	%	2.8	%

2024 Sales Compared to 2023

Total sales increased 2.8% and 2.3% during the three and six-month periods ended June 28, 2024, respectively, compared to the comparable periods in 2023, primarily as a result of core sales growth driven by the factors discussed below by segment.

Currency exchange rates and acquisitions, net of divestitures, decreased reported sales by 0.8% and 0.2%, respectively, during the three-month period ended June 28, 2024 compared to the comparable period in 2023. Currency exchange rates and acquisitions, net of divestitures, decreased reported sales by 0.3% and 0.2%, respectively, during the six-month period ended June 28, 2024 compared to the comparable period in 2023. Price increases contributed 2.0% and 2.1% to sales growth on a year-over-year basis during the three and six-month periods ended June 28, 2024, respectively, and are reflected as a component of core sales growth above.

Business Segments

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


	Three-Month Period Ended				Six-Month Period Ended
	June 28, 2024		June 30, 2023		June 28, 2024		June 30, 2023
Water Quality	$	777	$	756	$	1,526	$	1,485
Product Quality & Innovation	511		497		1,008		993
Total	$	1,288	$	1,253	$	2,534	$	2,478

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

Cost of Sales and Gross Profit


	Three-Month Period Ended						Six-Month Period Ended
($ in millions)	June 28, 2024			June 30, 2023			June 28, 2024			June 30, 2023
Sales	$	1,288		$	1,253		$	2,534		$	2,478
Cost of sales	(514)			(529)			(1,013)			(1,046)
Gross profit	$	774		$	724		$	1,521		$	1,432
Gross profit margin	60.1		%	57.8		%	60.0		%	57.8		%

Cost of sales decreased by $15 million or 2.8% during the three-month period ended June 28, 2024, as compared to the comparable period in 2023. Cost of sales decreased by $33 million or 3.2% during the six-month period ended June 28, 2024, as compared to the comparable period in 2023. For the three and six-month periods ended June 28, 2024, the decreases in cost of sales were driven primarily by the impact of lower year-over-year material costs and improved productivity.

Gross profit margins increased 230 basis points on a year-over-year basis for the three-month period ended June 28, 2024, as compared to the comparable period in 2023. Gross profit margins increased 220 basis points on a year-over-year basis for the six-month period ended June 28, 2024, as compared to the comparable period in 2023. For the three and six-month periods ended June 28, 2024 the increase in gross profit margins were driven by positive pricing actions and to a lesser extent lower material and improved productivity.

Operating Expenses


	Three-Month Period Ended						Six-Month Period Ended
($ in millions)	June 28, 2024			June 30, 2023			June 28, 2024			June 30, 2023
Sales	$	1,288		$	1,253		$	2,534		$	2,478
Selling, general and administrative (“SG&A”) expenses	(414)			(378)			(808)			(738)
Research and development (“R&D”) expenses	(61)			(57)			(121)			(113)

SG&A as a % of sales	32.1		%	30.2		%	31.9		%	29.8		%
R&D as a % of sales	4.7		%	4.5		%	4.8		%	4.6		%

SG&A expenses as a percentage of sales increased 190 basis points for the three-month period ended June 28, 2024, as compared to the comparable period in 2023. SG&A expenses as a percentage of sales increased 210 basis points for the six-month period ended June 28, 2024, as compared to the comparable period in 2023. For the three and six-month periods ended June 28, 2024, the increase in SG&A expenses as a percentage of sales was driven primarily by the increase in the Company’s SG&A expenses exceeding the increase in the Company’s sales, due to continued investments in sales and marketing growth initiatives, as well as the costs to operate as a stand-alone company.

R&D expenses as a percentage of sales increased by 20 basis points and by 20 basis points, respectively, during the three and six-month periods ended June 28, 2024 as compared to the comparable period in 2023, driven by growth related R&D initiatives.

Operating Profit Performance

Operating profit margins increased 10 basis points from 23.1% during the three-month period ended June 30, 2023 to 23.2% for the three-month period ended June 28, 2024.

Second quarter 2024 vs. second quarter 2023 operating profit margin comparisons were favorably impacted by:

Second quarter 2023 impairment charges related to customer relationships - 40 basis points

Second quarter 2024 vs. second quarter 2023 operating profit margin comparisons were unfavorably impacted by:

The impact of incremental costs associated with operating as a stand-alone company, incremental labor and sales and marketing growth initiatives offset by higher 2024 core sales - 30 basis points

Operating profit margins during the six-month period ended June 30, 2023 were flat compared to the six-month period ended June 28, 2024, at 23.4%.

Year-to-date 2024 vs. year-to-date 2023 operating profit margin comparisons were favorably impacted by:

Second quarter year-to-date 2023 impairment charge related to customer relationships in the Product Quality and Innovation segment - 20 basis points

Year-to-date 2024 vs. year-to-date 2023 operating profit margin comparisons were unfavorably impacted by:

Costs incurred as a result of the Separation from Danaher - 10 basis points
The impact of incremental costs associated with operating as a stand-alone company, incremental labor and sales and marketing growth initiatives offset by higher 2024 core sales and incremental year-over-year cost savings associated with material costs, restructuring and continuing productivity improvement initiatives - 10 basis points

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 municipal, industrial, commercial, residential, research and natural resource applications.

Water Quality Selected Financial Data


	Three-Month Period Ended						Six-Month Period Ended
($ in millions)	June 28, 2024			June 30, 2023			June 28, 2024			June 30, 2023
Sales	$	777		$	756		$	1,526		$	1,485
Operating profit	188			180			369			348
Depreciation	6			6			12			12
Amortization of intangible assets	4			5			9			10
Operating profit as a % of sales	24.2		%	23.8		%	24.2		%	23.4		%
Depreciation as a % of sales	0.8		%	0.8		%	0.8		%	0.8		%
Amortization as a % of sales	0.5		%	0.7		%	0.6		%	0.7		%

Sales Growth and Core Sales Growth


	% Change Three-Month Period Ended June 28, 2024 vs. Comparable 2023 Period		% Change Six-Month Period Ended June 28, 2024 vs. Comparable 2023 Period
Total sales growth (GAAP)	2.8	%	2.8	%
Impact of:
Acquisitions/divestitures	0.4	%	0.3	%
Currency exchange rates	0.8	%	0.3	%
Core sales growth (non-GAAP)	4.0	%	3.4	%

Total segment sales increased 2.8% during the three and six-month periods ended June 28, 2024 compared to the comparable periods in 2023, primarily as a result of core sales growth driven by the factors discussed below. Geographically, sales growth was driven by North America, which saw increases of 6.7% and 6.5% for the three and six-month periods ended June 28, 2024, respectively, compared to the comparable periods in 2023.

Price increases in the segment contributed 2.4% and 2.5% to sales growth on a year-over-year basis during the three and six-month periods ended June 28, 2024, respectively, and are reflected as a component of the change in core sales growth.

Core sales in the Water Quality segment increased 4.0% and 3.4% year-over-year during the three and six-month periods ended June 28, 2024, respectively. Geographically, core sales growth during the three-month period ended June 28, 2024, was driven by increases of 6.1% in North America and 2.0% in high-growth markets, driven by mid-single digit percentage core sales increase in China and low single digits core sales increase in Latin America, offset by decreases of 0.6% in Western Europe. Geographically, core sales growth during the six-month period ended June 28, 2024, was driven by increases of 6.1% in North America offset by decreases of 1.2% in Western Europe. Core sales were flat during the six-month period ended June 28, 2024 in high growth markets.

The increase in core sales in the three and six-month periods ended June 28, 2024 was driven by the chemical treatment solutions product line and, to a lesser extent, the analytical instrumentation and ultraviolet water disinfection product lines. Core sales in the chemical treatment solutions product line increased 7.8% and 6.4% year-over-year in the three and six-month periods, respectively, as a result of increased core sales across most major end-markets. Year-over-year core sales in the analytical instrumentation product line increased 2.7% and 2.3% for the three and six-month periods ended June 28, 2024, respectively, driven by all regions except Latin America. Core sales in the ultraviolet water disinfection product line increased by 2.2% and 2.7%, respectively, for the three and six-month periods, driven by demand in the municipal and residential end-markets.

Operating Profit Performance

Operating profit margins increased 40 basis points during the three-month period ended June 28, 2024 as compared to the comparable period in 2023.

Second quarter 2024 vs. second quarter 2023 operating profit margin comparisons were favorably impacted by:

Higher second quarter 2024 core sales volumes, product mix and incremental year-over-year cost savings associated with material costs, net of the impact of incremental year-over-year costs associated with labor and sales and marketing growth initiatives - 40 basis points

Operating profit margins increased 80 basis points during the six-month period ended June 28, 2024 as compared to the comparable period in 2023.

Year-to-date 2024 vs. year-to-date 2023 operating profit margin comparisons were favorably impacted by:

Higher year-to-date 2024 core sales and incremental year-over-year cost savings associated with material costs, net of the impact of incremental year-over-year costs associated with labor and sales and marketing growth initiatives - 80 basis points

PRODUCT QUALITY & INNOVATION

The Company’s Product Quality & Innovation segment provides 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.

Product Quality & Innovation Selected Financial Data


	Three-Month Period Ended						Six-Month Period Ended
($ in millions)	June 28, 2024			June 30, 2023			June 28, 2024			June 30, 2023
Sales	$	511		$	497		$	1,008		$	993
Operating profit	135			122			268			257
Depreciation	4			4			8			8
Amortization of intangible assets	6			7			12			14
Operating profit as a % of sales	26.4		%	24.5		%	26.6		%	25.9		%
Depreciation as a % of sales	0.8		%	0.8		%	0.8		%	0.8		%
Amortization as a % of sales	1.2		%	1.4		%	1.2		%	1.4		%

Sales Growth and Core Sales Growth


	% Change Three-Month Period Ended June 28, 2024 vs. Comparable 2023 Period		% Change Six-Month Period Ended June 28, 2024 vs. Comparable 2023 Period
Total sales growth (GAAP)	2.7	%	1.5	%
Impact of:
Acquisitions/divestitures	—	%	0.1	%
Currency exchange rates	0.7	%	0.2	%
Core sales growth (non-GAAP)	3.4	%	1.8	%

Total segment sales increased 2.7% and 1.5% year-over-year during the three and six-month periods ended June 28, 2024, respectively, primarily as a result of changes in core sales driven by the factors discussed below. Geographically, sales growth was driven by North America which saw increases of 3.7% and 2.1% for the three and six-month periods ended June 28, 2024, respectively, compared to the comparable periods in 2023. High-growth markets also experienced increased sales of 5.4% and 2.1% during the three and six-month periods ended June 28, 2024, respectively, compared to the comparable periods in 2023. Sales growth in Western Europe was flat and 1.3% during the three and six-month periods ended June 28, 2024, respectively, compared to the comparable periods in 2023.

Price increases in the segment contributed 1.4% and 1.5% to sales growth on a year-over-year basis during both the three and six-month periods ended June 28, 2024, respectively, and are reflected as a component of the change in core sales growth.

Core sales in the Product Quality & Innovation segment increased 3.4% and 1.8% year-over-year during the three and six-month periods ended June 28, 2024, respectively. Geographically, core sales growth during the three and six-month periods ended June 28, 2024 was driven by increases of 3.5% and 1.7% in North America and increases of 6.9% and 3.7% in high-growth markets, respectively. The core sales growth in the high-growth markets during the three and six-month periods ended June 28, 2024 was driven by low double digits and low teen core sales increases in Latin America partially offset by flat core sales in China. Core sales were flat in Western Europe during the three and six-month periods ended June 28, 2024, respectively.

From a product line perspective, core sales in the marking and coding business increased 3.6% and 1.2% year-over-year during the three and six-month periods ended June 28, 2024, respectively, driven by higher consumable demand in the industrial and consumer packaged goods end-markets. Core sales in the packaging and color solutions business increased 3.0% and 3.2% year-over-year during the three and six-month periods ended June 28, 2024, respectively, driven by improving capital spending across the consumer packaged goods and industrial end-markets.

Operating Profit Performance

Operating profit margins increased 190 basis points during the three-month period ended June 28, 2024 as compared to the comparable period in 2023.

Second quarter 2024 vs. second quarter 2023 operating profit margin comparisons were favorably impacted by:

Impact of second quarter 2023 impairment charges of customer relationships - 110 basis points
The impact of higher 2024 core sales and cost savings associated with restructuring and continuing productivity improvement initiatives, partially offset by incremental labor and sales and marketing growth initiatives - 80 basis points

Operating profit margins increased 70 basis points during the six-month period ended June 28, 2024 as compared to the comparable period in 2023.

Year-to-date 2024 vs. year-to-date 2023 operating profit margin comparisons were favorably impacted by:

The impact of second quarter year-to-date 2023 impairment charge related to customer relationships - 50 basis points
The impact of higher 2024 core sales and cost savings associated with restructuring and continuing productivity improvement initiatives, partially offset by incremental labor and sales and marketing growth initiatives - 20 basis points

OTHER INCOME (EXPENSE)

For a description of the Company’s other income (expense), net during the three and six-month periods ended June 28, 2024 and June 30, 2023, refer to Note 6 to the accompanying Consolidated and Combined Condensed Financial Statements.

INTEREST COSTS AND FINANCING

For a discussion of the Company’s outstanding indebtedness, refer to Note 9 to the accompanying Consolidated and Combined Condensed Financial Statements.

Net interest expense of $30 million and $58 million was recorded for the three and six-month periods ended June 28, 2024, arising from our outstanding indebtedness, which was incurred in September 2023. Before the Separation, Veralto depended on 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. As a result, with the exception of cash, cash equivalents and borrowings clearly associated with Veralto and related to the Separation, the Company recorded no interest expense in the Combined Condensed Financial Statements for periods prior to the Separation.

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 Consolidated and Combined Condensed 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.

The Company’s effective tax rate can be impacted by changes in the mix of earnings in countries with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, accruals related to contingent tax liabilities and period-to-period changes in such accruals, 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, changes in tax laws and regulations, and legislative policy changes. 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				Six-Month Period Ended
	June 28, 2024		June 30, 2023		June 28, 2024		June 30, 2023
Effective tax rate	24.8	%	24.0	%	25.6	%	23.5	%

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 June 28, 2024 differs from the U.S. federal statutory rate of 21% principally due to the geographic mix of earnings described above, net discrete expense of $3 million related primarily to the tax impact of uncertain tax positions, partially offset by excess tax benefits from stock-based compensation. The net discrete expense increased the effective tax rate by 1.1% for the three-month period ended June 28, 2024.

The effective tax rate for the six-month period ended June 28, 2024 differs from the U.S. federal statutory rate of 21.0% principally due to the geographic mix of earnings described above, the unfavorable impact of a non-deductible loss on the sale of a product line of $3 million, net discrete expense of $4 million related primarily to the tax impact of uncertain tax positions, partially offset by excess tax benefits from stock-based compensation. The net discrete expense increased the effective tax rate by 1.3% for the six-month period ended June 28, 2024.

The effective tax rate for the three-month period ended June 30, 2023 differs from the U.S. federal statutory rate of 21% principally due to the geographic mix of earnings described above, partially offset by net discrete benefits of $1 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 0.4% for the three-month period ended June 30, 2023.

The effective tax rate for the six-month period ended June 30, 2023 differs from the U.S. federal statutory rate of 21.0% principally due to 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 1.1% for the six-month period ended June 30, 2023.

The Company conducts business globally, and Danaher filed 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 non-U.S. 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 Consolidated and Combined Condensed Financial Statements given the geographic dispersion of the Company’s income.

The Company is routinely examined by various domestic and international taxing authorities. In connection with the Separation, the Company entered into certain agreements with Danaher, including a tax matters agreement. The tax matters agreement distinguishes between the treatment of tax matters for “Joint” filings compared to “Separate” filings prior to the Separation. “Joint” filings involve legal entities, such as those in the United States, that include operations from both Danaher and the Company. By contrast, “Separate” filings involve certain entities (primarily outside of the United States) that exclusively include either Danaher’s or the Company’s operations, respectively. In accordance with the tax matters agreement, Danaher is liable for and has indemnified the Company against all income tax liabilities involving “Joint” filings for periods prior to the Separation. The Company remains liable for certain pre-Separation income tax liabilities including those related to the Company’s “Separate” filings.

Pursuant to U.S. tax law, the Company expects to file its initial U.S. federal income tax return for the 2023 short tax year with the IRS during 2024. Therefore, the IRS has not yet begun an examination of the Company’s initial U.S. federal income tax return. The Company’s operations in certain U.S. states and foreign jurisdictions remain subject to routine examination.

The amount of income 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 “Item 1A. Risk Factors” in the 2023 Annual Report on Form 10-K.

COMPREHENSIVE INCOME

In 2024, comprehensive income decreased $39 million for the three-month period ended June 28, 2024 as compared to the comparable period in 2023, primarily driven by losses from foreign currency translation adjustments and to a lesser extent higher net earnings in the prior year period. Comprehensive income decreased $128 million for the six-month period ended June 28, 2024 as compared to the comparable period in 2023, primarily driven by losses from foreign currency translation adjustments and to a lesser extent higher net earnings in the prior year period. The Company recorded foreign currency translation losses of $29 million offset by an unrealized gain on their net investment hedge of $3 million for the three-month period ended June 28, 2024. The foreign currency translation losses were driven by the strengthening of the U.S. dollar against most major foreign currencies in the period, compared to gains of $7 million for the three-month period ended June 30, 2023, primarily driven by the weakening of the U.S. dollar against the euro in the period. The Company recorded foreign currency translation losses of $65 million offset by an unrealized gain on their net investment hedge of $12 million for the six-month period ended June 28, 2024. The foreign currency translation losses were driven by the strengthening of the U.S. dollar against most major foreign currencies in the period, compared to gains of $28 million for the six-month period ended June 30, 2023, primarily driven by the weakening of the U.S. dollar against the euro in the 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

Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing and financing 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.

Overview of Cash Flows and Liquidity

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


	Six-Month Period Ended
($ in millions)	June 28, 2024		June 30, 2023
Net cash provided by operating activities	$	366	$	457


Payments for additions to property, plant and equipment	(24)		(21)

All other investing activities	(10)		2
Net cash used in investing activities	$	(34)	$	(19)

Payment of dividends	$	(44)	$	—
Proceeds from the issuance of common stock	11		—
Net transfers to Former Parent	—		(438)
Net cash used in financing activities	$	(33)	$	(438)

Operating cash flows decreased $91 million, or 20%, during the six-month period ended June 28, 2024 as compared to the comparable period in 2023, primarily driven by cash interest payments of $57 million, cash tax payments of $142 million, and lower net income offset by changes in net working capital.
Net cash used in investing activities increased $15 million for the six-month period ended June 28, 2024 as compared to the comparable period in 2023 and consisted of a $3 million increase in capital expenditures and a $12 million increase in other investing activities.
Net cash used in financing activities decreased $405 million for the six-month period ended June 28, 2024 as compared to the comparable period in 2023 as the Company no longer returns cash to the Former Parent.

Dividends

Aggregate cash payments for dividends on Company common stock during the six-month period ended June 28, 2024 were $44 million.

In the second quarter of 2024, the Company declared a regular quarterly dividend of $0.09 per share of Company common stock payable on July 31, 2024 to holders of record as of June 28, 2024.

Cash and Cash Requirements

As of June 28, 2024, the Company held $1,043 million of cash and cash equivalents that were on deposit with financial institutions or invested in highly liquid investment-grade debt instruments with a maturity of 90 days or less. Of the cash and cash equivalents, approximately $378 million was held within the United States and approximately $665 million was held outside of the United States. 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, repurchasing shares of the Company’s common stock 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. 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 2017, 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. withholding taxes and U.S. state income 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 Veralto’s foreign subsidiaries are not readily determinable. As of June 28, 2024, management believes that it has sufficient sources of liquidity to satisfy its cash needs, including its cash needs in the United States.

Contractual Obligations

For a description of the Company’s lease obligations, commitments and litigation and contingencies, refer to Notes 8, 15 and 16 to the audited Consolidated and Combined Financial Statements included within the 2023 Annual Report on Form 10-K.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes to the Company’s critical accounting estimates as described in the 2023 Annual Report on Form 10-K.

Previous: Cover and table of contents · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK