Executive Summary / Key Takeaways

• Veralto operates essential technology solutions for water and product quality, benefiting from durable secular growth drivers in water, food, and essential goods markets where the cost of failure for customers is high.
• The Veralto Enterprise System (VES) is a core competitive advantage, driving continuous improvement, operational efficiency, commercial execution, and agility in navigating dynamic environments.
• Recent financial performance demonstrates strong execution, with Q1 2025 core sales growing 7.8% and adjusted operating profit margin reaching an all-time high of 25%, building on solid full-year 2024 results that exceeded initial guidance.
• Strategic portfolio actions, including the acquisitions of TraceGains and AQUAFIDES and the divestiture of AVT, are enhancing the portfolio towards higher growth, margins, and recurring revenue, while investments in R&D and commercial resources support future organic growth.
• Management has reaffirmed full-year 2025 adjusted EPS guidance of $3.60 to $3.70, anticipating low to mid-single-digit core sales growth and flat to 50 basis points of adjusted operating margin expansion, incorporating potential tariff impacts and planned countermeasures.

Safeguarding the World's Vital Resources: A Foundation for Durability

Veralto Corporation, forged from Danaher (DHR)'s Environmental Applied Solutions segment and spun off as an independent public company in September 2023, is guided by the unifying purpose of "Safeguarding the World's Most Vital Resources™." The company operates through two core segments: Water Quality (WQ) and Product Quality Innovation (PQI), providing essential technology solutions that monitor, enhance, and protect critical resources globally. This focus places Veralto squarely within markets characterized by durable secular growth drivers, including environmental resource sustainability, water scarcity, food and pharmaceutical security, and the increasing need for reliable product quality in a complex global supply chain. Approximately 85% of Veralto's sales are tied to the delivery of clean water, safe food, and trusted essential goods – areas where the cost of failure for customers is exceptionally high, making Veralto's solutions non-discretionary and fostering a resilient business model.

A cornerstone of Veralto's operational and strategic approach is the Veralto Enterprise System (VES). More than just a set of tools, VES is a comprehensive business management system rooted in a culture of continuous improvement (Kaizen). It guides operations, measures execution, and is organized around Operational Excellence, Growth, and Leadership. Management emphasizes that VES is deeply ingrained, empowering teams to solve problems rapidly, drive sustainable improvements, and enhance agility, particularly crucial in dynamic macroeconomic environments. This system is credited with driving disciplined execution, improving profitability, generating strong cash flows, and supporting strategic investments and acquisitions.

Technological Edge and Innovation Driving Differentiation

Veralto's competitive positioning is significantly bolstered by its differentiated technology across both segments. In Water Quality, brands like Hach provide proprietary precision instrumentation and consumables for water analysis. This technology offers a broad menu of tests and is focused on democratizing testing for utilities and municipalities. While specific quantifiable advantages over all competitors are not detailed, the emphasis is on precision and reliability in critical applications. In water treatment, Trojan Technologies is well-positioned in UV treatment systems, particularly benefiting from demand in recycle, reclaim, and reuse initiatives. Management highlights that Trojan's solutions offer greater energy efficiency in UV disinfection systems compared to some alternatives, a key advantage in environmentally conscious markets. ChemTreat provides chemical water treatment solutions, seeing strong demand in industrial markets like power generation, food and beverage, and chemical processing, often linked to water conservation and reuse efforts.

In the Product Quality Innovation segment, brands like Videojet and Linx offer marking and coding equipment and consumables. Videojet's systems are noted for higher reliability in coding applications compared to some competitors. Recent product launches, such as the 7920 UV Laser Marking System optimized for sustainable flexible films and the 2380 large character inkjet printer for sustainable packaging materials, demonstrate a focus on innovation aligned with evolving packaging trends and customer sustainability goals. The packaging and color businesses, including Esko, X-Rite, and Pantone, provide software and hardware solutions. Esko's S2 platform, a multi-tenant cloud-native platform utilizing AI, is a key technological differentiator. It aims to connect digital workflows from source to shelf, enabling customers to compress development cycles, accelerate time-to-market, ensure data integrity, and improve color accuracy. This integrated approach addresses critical pain points for consumer brands in their digitization journey.

These technological differentiators contribute to Veralto's competitive moat by providing tangible benefits to customers – whether it's improved efficiency, reliability, speed, or support for sustainability objectives. This allows Veralto to command value in its markets, supporting its strong margin profile and fostering customer loyalty, particularly within its high-margin recurring revenue streams (consumables, software, service).

Navigating the Competitive Currents

Veralto operates in highly competitive markets, facing both direct and indirect rivals. Key publicly traded competitors include Xylem Inc. (XYL) and Danaher Corporation in Water Quality, and Thermo Fisher Scientific Inc. (TMO) and Emerson Electric Co. (EMR) in Product Quality Innovation, among others.

Comparing Veralto to these peers reveals a nuanced competitive standing. Veralto's business model, heavily reliant on recurring revenue (approximately 61% of sales in Q1 2025) from its installed base, provides a degree of insulation from economic cycles and contributes to its durable growth profile. This contrasts with competitors more exposed to cyclical capital expenditure trends.

Financially, Veralto demonstrates strong profitability metrics. Its TTM Gross Profit Margin stands at 59.73%, Operating Profit Margin at 23.43%, and EBITDA Margin at 24.83%. While direct, perfectly comparable segment margins for all competitors are not uniformly available, Veralto's overall operating margin compares favorably to Xylem's 14.5% (2024) and Emerson's 20% (2024), though it trails Danaher's 28% (2024) and Thermo Fisher's 25% (2024). This suggests Veralto's focus on high-value, essential solutions and operational efficiency through VES translates into robust profitability within its specific market niches.

However, Veralto's growth trajectory, with full-year 2024 core sales growth of 3.7% and Q1 2025 core sales growth of 7.8%, while solid and trending positively, has historically lagged the higher growth rates reported by some larger, more diversified competitors like Xylem (16% in 2024) and Danaher (8% in 2024). This highlights a potential vulnerability related to scale and market share capture in broader segments where these competitors have a larger footprint. Veralto's strategy to counter this involves disciplined M&A in attractive adjacent markets and leveraging VES for organic growth initiatives, such as enhancing commercial execution and accelerating new product development.

Veralto's technological advantages, such as the energy efficiency of Trojan's UV systems or the workflow integration capabilities of Esko's S2 platform, provide quantifiable benefits that can justify premium pricing and foster customer loyalty, potentially increasing market share in specific high-margin niches. However, its smaller scale compared to giants like TMO or DHR can sometimes result in higher per-unit costs, potentially impacting margins in price-sensitive areas. The company's asset-light manufacturing model, while supporting agility, also involves supply chain dependencies that require active management, particularly in the face of evolving trade policies.

Overall, Veralto positions itself as a focused leader in essential resource safeguarding, leveraging its durable business model, technological differentiation, and the power of VES to compete effectively against larger, more diversified players and more specialized niche competitors. Its direct sales force provides valuable market insight, enabling agile responses to customer needs and competitive pressures.

Performance Reflecting Strategy and Execution

Veralto's recent financial performance underscores the effectiveness of its strategy and operational execution. The company delivered a strong first full year as a public entity in 2024, exceeding its initial guidance with 3.7% core sales growth and 80 basis points of adjusted operating profit margin expansion, resulting in adjusted EPS of $3.54.

This momentum carried into 2025, with Veralto reporting excellent results for the first quarter ended April 4, 2025. Total sales grew 6.9% year-over-year to $1,332 million, driven by robust 7.8% core sales growth. This core growth was broad-based, with PQI delivering 8.3% and Water Quality delivering 7.4%. Volume was a significant contributor to this growth, marking a positive trend. The company's high level of recurring revenue, representing approximately 61% of total sales in Q1 2025, continued to provide a stable foundation.

Profitability saw notable improvement in Q1 2025. Gross profit margin expanded 40 basis points year-over-year to 60.4%, benefiting from positive pricing actions and the favorable margin profile of recent acquisitions, partially offset by currency impacts. Adjusted operating profit margin reached an all-time high of 25%, expanding 50 basis points year-over-year. This expansion was driven by strong operating leverage on higher core sales and efficient cost management, despite incremental investments in sales, marketing, and R&D, and the dilutive impact of certain strategic initiatives and acquisitions/dispositions. Net earnings for the quarter totaled $225 million, resulting in adjusted EPS of $0.95, exceeding prior guidance.

The company's liquidity position remains strong. As of April 4, 2025, Veralto held approximately $1.2 billion in cash and cash equivalents. Net debt stood at $1.4 billion, resulting in a comfortable net leverage ratio of 1.1x. Operating cash flows increased significantly in Q1 2025 compared to the prior year, driven by higher net income and favorable working capital changes. This strong financial position provides ample flexibility for continued investment in the business, strategic M&A, managing debt obligations, and returning capital to shareholders (including through dividends, such as the recently declared $0.11 per share quarterly dividend).

Strategic portfolio actions have been a key focus since the spin-off. The acquisitions of TraceGains (early Q4 2024) and AQUAFIDES (agreement signed Feb 2025) are aimed at enhancing the PQI and WQ segments, respectively, adding high-growth, high-margin, or strategically complementary capabilities. The divestiture of the AVT product line (expected Q1 2025 completion) is part of this portfolio optimization, focusing the business on core, higher-performing areas. These actions, along with a minority investment in Axine Water Technologies (Q4 2024) focused on emerging contaminant treatment, demonstrate a disciplined approach to capital allocation with a clear bias towards M&A that aligns with the company's purpose and financial criteria.

Outlook and Forward Momentum

Looking ahead, Veralto's management has reaffirmed its full-year 2025 adjusted EPS guidance of $3.60 to $3.70 per share. This outlook incorporates the company's current assessment of the macroeconomic environment, including potential impacts from tariffs and trade policies.

The guidance assumes full-year 2025 core sales growth in the low to mid-single-digit range year-over-year. This is supported by expectations of positive secular growth drivers in the Water Quality segment, particularly in North American industrial markets and steady demand at municipalities. In the Product Quality Innovation segment, management anticipates steady demand in consumer-packaged goods markets as the year progresses, building on the recovery trends observed in 2024. The guidance also assumes a neutral impact on total sales growth from recent acquisitions and divestitures, as the contributions from TraceGains and AQUAFIDES are expected to be largely offset by the AVT divestiture. Currency translation is anticipated to be a headwind to total sales based on current rates.

From a profitability standpoint, Veralto is targeting full-year 2025 adjusted operating profit margin to be flat to up 50 basis points compared to 2024, implying approximately 25 basis points of expansion at the midpoint. This reflects a prudent approach given the dynamic macroeconomic landscape and the potential timing differences between the implementation of tariff increases (estimated gross exposure around 3.5% of sales) and the full realization of countermeasures. Management is actively deploying strategic pricing, sourcing, and manufacturing footprint adjustments (like accelerating the Trojan U.S. factory opening) to mitigate tariff impacts and expects these countermeasures to largely offset the gross exposure. The guidance also factors in corporate expenses around $100 million for the full year.

For the second quarter of 2025, Veralto expects core sales to grow in the low to mid-single-digit range year-over-year across both segments, with adjusted EPS guided between $0.84 and $0.88 per share.

While the outlook is positive, Veralto faces risks including potential negative impacts from global economic conditions, intense competition, the ability to successfully integrate acquisitions and realize synergies, supply chain disruptions, and changes in regulations or trade policies. The company's reliance on its direct sales force and decentralized operating model, while strengths, also require consistent execution.

Conclusion

Veralto Corporation has demonstrated a strong start as an independent company, leveraging its durable business model, essential product portfolio, and the power of the Veralto Enterprise System to deliver consistent performance and profitable growth. The company's focus on safeguarding vital resources positions it within attractive, non-optional markets driven by compelling secular trends.

Recent financial results highlight solid core growth and expanding margins, reflecting effective operational execution and strategic investments. The disciplined approach to capital allocation, with a clear bias towards value-accretive M&A and targeted portfolio optimization, is enhancing the company's profile. While macroeconomic uncertainties and evolving trade policies present challenges, management's proactive countermeasures and the inherent agility provided by the VES and asset-light model offer confidence in navigating these dynamics. The reaffirmed full-year 2025 guidance signals continued momentum, underpinned by expected growth in key end markets and the benefits of ongoing strategic initiatives. For investors, Veralto represents a compelling opportunity rooted in durability, strategic execution, and a commitment to long-term value creation in essential global markets.