Veralto Corp (VLTO)·Q2 2025 Earnings Summary

Executive Summary

• Q2 2025 delivered solid execution: sales $1.371B (+6.4% YoY), adjusted EPS $0.93, adjusted operating margin 23.7%; recurring revenue was 61% of sales, with price contribution of 1.7% .
• Veralto raised FY 2025 guidance: adjusted EPS to $3.72–$3.80 (from $3.60–$3.70) and core sales growth to mid-single digits; Q3 adjusted EPS guided to $0.91–$0.95; margin expansion target remains flat to +50 bps; FCF conversion 90–100% .
• Segment highlights: Water Quality sales $825M (+5% core, adj. margin 25.9%); PQI sales $546M (+4.6% core, adj. margin 25.6% with near-term margin pressure from tariffs, investments, and integration) .
• Catalyst: Upside to consensus on revenue and EPS; FY guidance raised; management expects tariffs to be net neutral in 2025 and sees secular demand tailwinds (water reuse, data centers, CPG) supporting steady growth .

What Went Well and What Went Wrong

What Went Well

• Broad-based growth: core sales +4.8% company-wide; Water Quality +5.0%; PQI +4.6%, with Western Europe water quality up 11.4% and North America water quality +5.7% .
• Margin resilience in Water Quality: adjusted operating margin 25.9% (+120 bps YoY), driven by analytics at municipalities, industrial treatment, and UV installations; recurring revenue steady at ~4% growth .
• Strong cash generation and balance sheet: operating cash flow $339M; FCF $323M; net debt $1.1B, net leverage just under 1x; cash on hand >$1.5B, gross debt $2.7B .
• Management quote: “We delivered a strong second quarter led by outstanding commercial execution and steady, broad-based customer demand.” — Jennifer L. Honeycutt, CEO .

What Went Wrong

• PQI margin compression: adjusted OP margin 25.6% with pressure from (1) TraceGains investment, (2) timing lag between tariff costs and pricing actions, and (3) supply chain/manufacturing line changes and growth investments; expected to phase out through H2 .
• China softness persists: water quality “bouncing along the bottom”; first-half China sales flat YoY; no recovery baked into H2 guidance .
• Q2 PQI Europe sequential dip vs Q1 driven by timing of new equipment sales, albeit YTD Europe PQI still +6% .

Financial Results

Segment breakdown (Q2 2025):

KPIs (Q2 2025):

Guidance Changes

Other relevant press releases during Q2 window:

• Veralto commits €20M to Emerald Technology Ventures’ Global Water Fund II to augment water innovation pipeline .

Earnings Call Themes & Trends

Management Commentary

• “Through the first half, we grew core sales mid-single-digits, expanded adjusted operating profit margins and delivered double-digit adjusted earnings per share growth.” — Jennifer L. Honeycutt, CEO .
• “Water quality’s equipment sales grew about 10%, with recurring sales growth steady at about 4% year-over-year… adjusted operating profit margin… up 120 bps.” — Sameer Ralhan, CFO .
• “PQI’s adjusted operating profit was $140 million… margin 25.6%. The year-over-year change… reflects… TraceGains investment, timing difference between tariffs and pricing, and supply chain/manufacturing line changes.” — Sameer Ralhan .
• “We expect a neutral net impact from tariffs on our 2025 EPS.” — Sameer Ralhan .
• “We continue to see ongoing traction with new customers at existing data centers and are well-positioned to capitalize on the build-out of new data centers.” — Jennifer L. Honeycutt .

Q&A Highlights

• PQI margin dynamics: impact split roughly one-third each between (1) TraceGains growth investment, (2) tariff/pricing timing, (3) supply chain/manufacturing changes; uplift expected to start in Q3 and be “meaningfully better” in Q4 .
• Pricing actions: targeted, structural, did not reprice backlog; price contribution uptick visible in Q2; run-rate impact in Q3/Q4, faster in Water Quality, later in PQI .
• Demand quality: No evidence of pre-buying; order patterns normal; 80% of revenue tied to food, water, essential goods supporting durability .
• China: First half flat YoY; water quality weaker with tough UV comp; no recovery assumed in H2 guide .
• Balance sheet/capital allocation: net leverage <1x; bias to M&A with disciplined approach; Emerald fund commitment to augment innovation pipeline .

Estimates Context

Values retrieved from S&P Global.*

Where estimates may adjust:

• PQI margins likely recover into Q4 as pricing offsets tariff costs and supply chain changes normalize; Water Quality margins tracking ahead; could lift FY margin realization above midpoint if H2 execution holds .
• Currency now expected to be ~1% tailwind to full-year sales; consensus revenue models may reflect slightly higher top-line .
• Tariffs net neutral to 2025 EPS reduces prior downside risk in models .

Key Takeaways for Investors

• Quality beat: Q2 revenue and adjusted EPS exceeded S&P consensus; FY EPS and core sales guidance raised—supports positive estimate revisions and sentiment [GetEstimates]*.
• Water Quality is the growth/margin anchor: 5% core growth; 120 bps margin expansion; equipment +~10%; recurring steady—visibility remains high .
• PQI transitory margin pressure should abate: pricing actions phasing in; TraceGains investment scaling; expect sequential margin improvement into Q4—watch H2 cadence .
• Secular tailwinds intact: data centers, water reuse, municipal UV, and CPG stability underpin mid-single-digit core growth algorithm .
• Balance sheet optionality: net leverage <1x, cash >$1.5B; pipeline for M&A active; Emerald fund commitment enhances water tech visibility—potential for strategic tuck-ins .
• Risk monitor: China recovery not assumed; PQI pricing/tariff timing execution; macro/trade policy fluidity—management indicates neutral tariff impact and steady demand .
• Near-term trading: Focus on Q3 EPS guide $0.91–$0.95 and sequential margin trajectory; any signs of PQI margin inflection or incremental WQ strength could be stock-positive .