Grade: C — One Red Flag, Two Watch Items, Danaher DNA Intact
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed February 20, 2026, FY ended December 31, 2025) + Yahoo Finance
Auditor: Ernst & Young LLP — Unqualified opinion (1 critical audit matter: Goodwill impairment)
One-line verdict: Veralto — the water quality and product quality spinoff from Danaher — delivered 6.0% revenue growth to $5,503M, 60.0% gross margin, CFFO/NI of 1.15x, and FCF/NI of 1.08. This is a high-quality industrial compounder in its second year as a public company. The single fail — goodwill+intangibles at 108% of equity — reflects the Danaher heritage of acquisition-driven growth. Cash of $2.0B covers 71% of $2.9B debt (a watch item, not a fail). Debt/EBITDA is 2.1x and interest coverage is 13.3x. The M-Score of -2.47 is clean, the Z-Score of 3.73 is safe, and the F-Score is an extremely low 0.16%. The operating metrics are pristine; the only blemish is the structural goodwill from the Danaher platform.
| Metric | Result |
|---|---|
| Red Flags | **1** (D1 goodwill+intangibles 108% of equity) |
| Watch Items | **2** (A2 AR vs revenue, C4 cash-to-debt 71%) |
| Checks Completed | **18/18** |
| Beneish M-Score | **-2.47** (clean) |
| Altman Z-Score | **3.73** (safe zone) |
| F-Score (Fraud Probability) | **0.43** (0.16% probability — very low) |
Danaher's Water and Product Quality Spinoff
Veralto was spun off from Danaher Corporation in September 2023 and operates through two segments: Water Quality and Product Quality & Innovation (PQI). Water Quality includes water analytics, treatment, and infrastructure monitoring. PQI includes product identification, packaging, and color management solutions.
The company operates the Danaher Business System (DBS) — the operational playbook for continuous improvement and lean management. Revenue by geography: North America $2,639M, Western Europe $1,241M, Other developed markets $118M, High-growth markets $1,505M. Total: $5,503M.
EY's critical audit matter is goodwill impairment. As of December 31, 2025, goodwill was $2.8B. The Company uses the market approach based on trading multiples of EBITDA to estimate fair value. No impairment was recorded in FY2025.
Revenue composition: Recurring revenue of $3,359M (61% of total) provides visibility and stability. Non-recurring revenue of $2,144M (39%).
Financial Performance: Steady Growth in Year Two
| Metric | FY2025 | FY2024 | FY2023 | FY2022 |
|---|---|---|---|---|
| Total Revenue | $5,503M | $5,193M | $5,021M | $4,870M |
| Gross Profit | $3,299M | $3,105M | $2,901M | $2,760M |
| Gross Margin | 60.0% | 59.8% | 57.8% | 56.7% |
| Operating Income | $1,277M | $1,208M | $1,140M | $1,112M |
| Net Income | $940M | $833M | $839M | $845M |
| EBITDA | $1,347M | $1,277M | $1,213M | $1,203M |
| Interest Expense | $96M | $113M | $30M | $0M |
Revenue grew 6.0%, extending a multi-year trend of mid-single-digit growth. Gross margin expanded 20bp to 60.0% — an exceptional level for an industrial company and testimony to the DBS operational model. Operating margin of 23.2% is elite.
Net income grew 12.8% from $833M to $940M. EPS: basic $3.79 (+12.5%), diluted $3.76 (+12.6%). Interest expense declined from $113M to $96M as Veralto begins to deleverage from its initial capital structure.
Cash Flow: Clean Conversion, Capital Light
| Metric | FY2025 | FY2024 | FY2023 | FY2022 |
|---|---|---|---|---|
| Operating Cash Flow | $1,077M | $875M | $963M | $870M |
| CapEx | $(63)M | $(55)M | $(54)M | $(34)M |
| Free Cash Flow | $1,014M | $820M | $909M | $836M |
| Buybacks | $0 | $0 | $(147)M | $(781)M |
| Dividends | $(109)M | $(89)M | $0 | $0 |
| D&A | $78M | $78M | $87M | $90M |
CFFO/NI of 1.15x is healthy. FCF/NI of 1.08 means virtually all earnings convert to cash. CapEx of $63M on $5.5B revenue (1.1% CapEx intensity) makes this one of the most capital-light industrials in the S&P 500.
FCF of $1,014M easily covers dividends of $109M. Veralto has not repurchased shares in FY2024 or FY2025, accumulating cash instead. Cash grew from $1,101M to $2,031M — building a war chest for acquisitions, consistent with the Danaher M&A playbook.
Balance Sheet: Clean Post-Spin Structure
| Item | Dec 31, 2025 | Dec 31, 2024 |
|---|---|---|
| Cash & Equivalents | $2,031M | $1,101M |
| Accounts Receivable | $897M | $812M |
| Inventories | $307M | $288M |
| Total Current Assets | $3,432M | $2,387M |
| Goodwill | $2,838M | $2,693M |
| Other Intangible Assets | $524M | $535M |
| Total Assets | $7,693M | $6,406M |
| Total Debt | $2,879M | $2,767M |
| Total Liabilities | $4,587M | $4,361M |
| Stockholders' Equity | $3,105M | $2,038M |
| Retained Earnings | $1,744M | $917M |
Equity grew 52% from $2,038M to $3,105M, primarily from retained earnings ($917M to $1,744M). Goodwill grew $145M to $2,838M, reflecting small bolt-on acquisitions consistent with the Danaher model.
Cash of $2,031M covers 71% of $2,879M debt — approaching net cash. Debt/EBITDA of 2.1x and interest coverage of 13.3x are comfortable. Balance sheet per Note 9: Finished goods $130M, Work in process $45M, Raw materials $132M = Total inventory $307M — a lean $307M against $5.5B revenue.
The 18-Point Screening
Revenue Quality
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 60 days, +2 days YoY |
| A2 | AR vs Revenue Growth | WATCH | AR +10.5% exceeds revenue +6.0% |
| A3 | Revenue vs CFFO | PASS | Revenue +6.0%, CFFO +23.1% |
A2 context: AR grew from $812M to $897M (+10.5%) vs 6.0% revenue growth. DSO expanded 2 days. For a company with 48% international revenue (including high-growth markets with longer payment terms), AR can outpace revenue due to geographic mix. CFFO growing 23.1% confirms cash is backing the revenue.
Expense Quality
| # | Check | Result | Detail |
|---|---|---|---|
| B1 | Inventory vs COGS | PASS | Inventory +6.6% vs COGS +5.6% |
| B2 | CapEx vs Revenue | PASS | CapEx +14.5% vs revenue +6.0% |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 53.2% |
| B4 | Gross Margin | PASS | 60.0%, +0.2pp |
Cash Flow Quality
| # | Check | Result | Detail |
|---|---|---|---|
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.15 |
| C2 | Free Cash Flow | PASS | FCF $1.0B, FCF/NI = 1.08 |
| C3 | Accruals Ratio | PASS | -1.8% — low |
| C4 | Cash vs Debt | WATCH | Cash $2.0B covers 71% of debt $2.9B |
Balance Sheet
| # | Check | Result | Detail |
|---|---|---|---|
| D1 | Goodwill + Intangibles | **FAIL** | $3.4B = 108% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 2.1x |
| D3 | Soft Asset Growth | PASS | Other assets +15.7% vs revenue +6.0% |
| D4 | Asset Impairment | PASS | Write-offs normal |
D1 context: Goodwill+intangibles of $3.4B at 108% of equity reflects the Danaher acquisition heritage. As Veralto builds equity through retained earnings (growing rapidly from $917M to $1,744M), this ratio will naturally decline. The underlying businesses — water quality analytics and product identification — have strong competitive positions and stable end markets that support the goodwill valuation.
Acquisition Risk & Manipulation Score
| # | Check | Result | Detail |
|---|---|---|---|
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill +4% YoY |
| F1 | Beneish M-Score | PASS | M-Score = -2.47 (clean) |
Key Risks from the 10-K
1. Goodwill Impairment — EY's Critical Audit Matter
EY flagged goodwill impairment as the CAM. Veralto uses market-based EBITDA trading multiples to estimate fair value. No impairment was recorded, but the valuation is sensitive to market multiple compression. If the market de-rates industrial companies, fair value estimates could decline below carrying value.
2. Foreign Currency Exposure
48% of revenue comes from outside North America (Western Europe $1,241M, high-growth markets $1,505M). The 10-K warns about currency fluctuations affecting financial statements. With exposure to emerging market currencies, FX movements can be volatile.
3. Standalone Company Risk
As a relatively new public company (spun off September 2023), Veralto is still establishing independent capabilities that were previously provided by Danaher. IT systems, corporate functions, and shared services transitions carry execution risk.
4. Acquisition Integration
The Danaher playbook depends on acquiring and integrating businesses at attractive returns. Future acquisitions may not achieve the same returns, and integration execution carries risk.
Summary
Grade: C. One structural fail (goodwill 108% of equity, declining as equity builds). Two minor watch items. All operating metrics are pristine.
Veralto is a textbook high-quality industrial compounder: 60% gross margin, 23% operating margin, 1.15x CFFO/NI, 1.08x FCF/NI, 1.1% CapEx intensity, 61% recurring revenue, 2.1x Debt/EBITDA, 13.3x interest coverage, and rapidly building equity. The M-Score of -2.47 is clean, the Z-Score of 3.73 is safe, and the F-Score of 0.16% is among the lowest in the S&P 500.
The $2.0B cash position (approaching net cash) and $1.0B annual FCF provide firepower for the Danaher-style bolt-on acquisition strategy. As equity continues to build through retained earnings, the goodwill/equity ratio will naturally decline below the 100% threshold.
The only genuine concern is the AR outpacing revenue by 4.5 percentage points — but with CFFO growing 23.1%, cash collection is healthy.
**Disclaimer**: This report is based on Veralto Corporation's FY2025 10-K filed with SEC EDGAR on February 20, 2026. This is NOT investment advice.
Data: SEC EDGAR 10-K + Yahoo Finance
Auditor: Ernst & Young LLP (Unqualified opinion, 1 critical audit matter — Goodwill impairment)
Fiscal year ended: December 31, 2025