Veralto Corporation 10-Q Summary
Business context and reporting period
Veralto filed its first quarterly report for the period ended September 29, 2023. The company was separated from Danaher on September 30, 2023, with Veralto shares beginning regular-way trading on the NYSE on October 2, 2023 under “VLTO.” The filing presents unaudited carve-out combined financial statements derived from Danaher’s historical records; allocated costs and financing activity may not represent results as a standalone public company.
Veralto operates through Water Quality and Product Quality & Innovation, providing water analytics and treatment, marking and coding, packaging, and color and appearance-management solutions. It had approximately 16,000 associates in more than 45 countries.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Sales | $1,255 million | $1,219 million | $3,733 million | $3,622 million |
| Gross profit | $723 million | $694 million | $2,155 million | $2,049 million |
| Gross margin | 57.6% | 56.9% | 57.7% | 56.6% |
| Operating profit | $273 million | $285 million | $854 million | $818 million |
| Operating margin | 21.8% | 23.4% | 22.9% | 22.6% |
| Net earnings | $205 million | $218 million | $639 million | $629 million |
| Basic and diluted EPS | $0.83 | $0.89 | $2.59 | $2.55 |
- Revenue mix: Recurring revenue was $744 million in the quarter and $2,210 million year to date, approximately 59% of nine-month sales. Remaining performance obligations were $286 million at September 29, 2023.
- Segment performance: Q3 Water Quality sales rose 4.0% to $772 million and operating profit rose to $188 million; Product Quality & Innovation sales rose 1.0% to $483 million, while operating profit declined to $99 million.
- Cash flow: Nine-month operating cash flow was $700 million, up from $533 million. Capital expenditures were $32 million, and net cash used in investing activities was $33 million.
- Liquidity: Cash and equivalents were $426 million at September 29, 2023. The balance was largely held outside the United States.
- Debt: Long-term debt was $2,604 million, consisting of senior unsecured notes maturing from 2026 through 2033. Fair value was $2,587 million. The company had no borrowings under its $1.5 billion five-year revolving credit facility.
- Debt covenant: The credit facility includes a maximum consolidated net leverage ratio of 3.75:1.00, tested beginning with the quarter ended September 29, 2023. The company reported compliance with its debt covenants.
- Tax: The effective tax rate was 23.5% for both the quarter and nine months, compared with 23.5% and 23.1%, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Q3 sales increased 3.0%, comprising 1.0% core sales growth, a 0.5% acquisition contribution, and a 1.5% favorable currency impact. Nine-month sales also increased 3.0%, with 3.0% core sales growth, a 0.5% acquisition contribution, and a 0.5% unfavorable currency impact.
- Q3 net earnings declined 6.0% because operating expenses increased as the company prepared to operate independently. Nine-month net earnings increased 1.6%.
- Q3 operating margin declined 160 basis points, primarily due to higher standalone-company, labor, sales and marketing costs and a $6 million intangible-asset impairment charge. Nine-month operating margin improved 30 basis points.
- Gross margins improved by 70 basis points in Q3 and 110 basis points year to date, supported by pricing and lower material costs, partly offset by labor and foreign-exchange effects.
- Q3 developed-market sales increased 6.0%, while high-growth-market sales declined 4.5%, primarily because of more than 20% declines in China. Product Quality & Innovation experienced weaker demand in consumer packaged goods and industrial markets.
- Operating cash flow increased $167 million, or 31%, primarily because of favorable working-capital changes. No acquisition cash payments were made during the 2023 nine-month period, compared with $51 million in 2022.
- The company issued approximately $2.1 billion of U.S. dollar senior notes and €500 million of euro notes. Net proceeds of approximately $2.6 billion were paid to Danaher as consideration for the contributed businesses.
Guidance, outlook, risks and unusual items
Management expects fourth-quarter 2023 core sales to be affected by weaker consumer-packaged-goods demand in Product Quality & Innovation and broad weakness in China affecting both segments. Management stated that the company has access to capital resources and is focused on profitability improvements through the Veralto Enterprise System.
- A $15 million impairment of an equity-method investment was recorded in the nine-month period.
- Intangible-asset impairment charges were $6 million in Q3 and $12 million year to date, compared with $9 million for the prior-year nine-month period.
- Foreign-currency translation losses were $62 million in Q3 and $34 million year to date, versus losses of $97 million and $212 million, respectively, in the prior-year periods.
- Incremental stock-based compensation expense related to converting Danaher awards is expected to total $12 million, including $6 million after the separation in Q4 2023.
- Veralto intends to initiate a quarterly cash dividend of $0.09 per common share in arrears after the quarter ending December 31, 2023, subject to board approval.
- Key risks include China and macroeconomic weakness, consumer and industrial demand cyclicality, competition, foreign-exchange volatility, cyber and supply-chain disruptions, product liability, regulation, tax audits, impairment of goodwill or intangible assets, pension obligations, and the company’s limited history as an independent public company.
- Danaher retains certain net tax liabilities for periods ended on or before September 29, 2023, while Veralto and Danaher may have joint and several liability under the tax matters agreement. The filing also notes risks that separation-related tax benefits could be challenged.
- Warranty liabilities were $34 million at September 29, 2023, and expected 2023 pension contributions were $5 million.
Facts investors should verify
- How post-separation corporate costs, transition-service expenses and standalone public-company costs affect margins and earnings.
- Progress in reducing exposure to China and stabilizing Product Quality & Innovation demand.
- Cash generation relative to interest expense, debt maturities and the potential $1.5 billion revolving facility capacity.
- Compliance with the 3.75:1.00 net leverage covenant and any future incremental borrowing.
- Whether the planned $0.09 quarterly dividend is approved and sustained.
- Actual post-separation results compared with the carve-out financial statements, including the effect of Danaher allocations and related-party arrangements.
- Future impairment charges, tax exposures, separation-related liabilities and the realization of the $286 million remaining performance obligations.
- The development of an active trading market and the effectiveness of standalone internal controls and public-company processes.