Envista Holdings Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 27, 2019; comparisons are with the quarter ended September 28, 2018. The filing also reports nine-month results. Envista supplies dental implants, orthodontic products, equipment and consumables through Specialty Products & Technologies and Equipment & Consumables. Envista completed its IPO and separation from Danaher on September 20, 2019. Pre-separation financials are combined carve-out results and include Danaher cost allocations; they may not represent standalone costs.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $659.3m | $679.5m | $2,031.1m | $2,085.5m |
| Gross profit / margin | $367.0m / 55.7% | $380.9m / 56.1% | $1,123.7m / 55.3% | $1,179.6m / 56.6% |
| Operating profit / margin | $78.7m / 11.9% | $81.4m / 12.0% | $199.5m / 9.8% | $230.8m / 11.1% |
| Net earnings | $62.1m | $64.1m | $161.5m | $179.5m |
| Diluted EPS | $0.48 | $0.50 | $1.25 | $1.40 |
| Operating cash flow | Not provided for quarter | $210.5m | $210.5m | |
| Capital expenditures | Not provided for quarter | $61.9m | $40.2m |
- Q3 reported sales declined 3.0%; core sales, a non-GAAP measure excluding discontinued products and currency effects as well as acquisitions, declined 0.5%. Nine-month reported sales fell 2.5%, while core sales grew 1.5%.
- Q3 sales by segment: Specialty Products & Technologies $317.8m, down slightly from $318.3m; operating profit $54.6m versus $51.5m. Equipment & Consumables sales were $341.5m versus $361.2m; operating profit $31.1m versus $36.9m.
- Nine-month free cash flow, calculated as operating cash flow less capital expenditures, was approximately $148.6m, versus $170.3m in 2018. Capital spending rose chiefly for Specialty segment capacity and costs of becoming a standalone company.
- At September 27, cash and equivalents were $193.2m; current assets $978.5m and current liabilities $760.7m. Debt totaled $1,312.0m, including $1,304.5m long-term debt and $7.5m current debt. The $250m revolving facility was undrawn; the company reported covenant compliance.
- Debt consists principally of $650m U.S. dollar and €600m euro unsecured term loans, both due 2022. Stated rates were 3.5% and 1.2%, respectively. The credit agreement sets leverage and interest-coverage tests.
Changes, outlook and risks
- Profitability weakened year over year, particularly for the nine-month period. Management cited lower pricing, softer sales volumes and sales, marketing and product-development investments; productivity savings partly offset these pressures. Q3 gross margin declined 40 basis points and operating margin 10 basis points; nine-month margins fell 130 basis points each.
- Management reported low-single-digit core growth in high-growth markets in Q3, led by China and offset by Latin American weakness. Developed-market core sales declined low single digits, primarily in North America and Western Europe. Equipment & Consumables faced lower equipment demand, particularly in North America.
- Foreign exchange reduced reported sales by approximately 1.5% in Q3 and 2.5% for nine months. If exchange rates at September 27 persisted, management estimated currency would reduce full-year 2019 sales by approximately 2.5% year over year. This is an estimate, not formal earnings guidance; no specific full-year revenue or earnings guidance is provided in the filing.
- Separation financing and ownership are significant changes: Envista paid Danaher approximately $2.0bn for the transferred dental business, funded in part with IPO proceeds of approximately $643m and term-loan proceeds. Danaher retained 80.6% ownership and control as of October 18, 2019. Danaher said it intended to distribute its remaining interest, but has no obligation or timetable to do so.
- Cash flow and comparisons are affected by the transition from Danaher’s centralized treasury and shared services. The filing also records operating lease liabilities following adoption of ASC 842, including $213.8m at quarter-end; the adoption materially affected the balance sheet but did not significantly affect earnings or cash flows.
- Other notable exposures include $81m accrued for probable and estimable legal matters, foreign-exchange risk, goodwill impairment judgment (no triggering impairment event identified), regulatory and product-liability risks, distributor/customer concentration, and execution risks from separation and Danaher transition agreements. One customer represented 13% of Q3 sales and 12% of nine-month sales.
Investor verification priorities
- Track segment sales and margins, especially the continuing weakness in Equipment & Consumables and whether Specialty growth offsets it.
- Assess underlying growth separately from currency and discontinued-product effects; core sales is a company-defined non-GAAP measure.
- Review debt service, floating-rate exposure, covenant headroom and use of the undrawn revolver as a newly independent company.
- Monitor Danaher’s control, any eventual distribution, transition-service arrangements, and potential tax consequences or restrictions.
- Reconcile standalone costs and cash generation in future periods against the Danaher-allocated, pre-separation comparison periods; monitor legal reserves, goodwill assumptions and foreign-exchange impacts.