Envista Holdings Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 29, 2023; comparisons are with the quarter ended September 30, 2022. The filing also reports year-to-date results for the nine months ended September 29, 2023. Figures are unaudited and, unless noted, in millions of dollars.
Business context
Envista supplies dental implants, orthodontic products, equipment, software and consumables through Specialty Products & Technologies (SP&T) and Equipment & Consumables (E&C). It operates internationally; customers outside the U.S. generated 51.1% of Q3 sales. The 2022 sale of substantially all of the KaVo treatment-unit and instrument business is reflected as discontinued operations in the 2022 comparison; no discontinued-operation activity was reported in 2023.
Financial performance and liquidity
- Q3 sales: $631.3, essentially unchanged from $631.1. Core sales growth, a non-GAAP measure excluding acquisitions, discontinued products and currency effects, was 0.8%. Volume rose 3.7%, offset by a 2.9% decline in price. Gross profit was $363.3; gross margin was 57.5%, versus 57.8%.
- Q3 earnings: Operating profit was $83.3 (13.2% margin), up from $74.5 (11.8%). Net income was $21.5, down 54.8% from $47.6; diluted EPS was $0.12 versus $0.27. The decline chiefly reflects $32.1 of other expense, including a $28.5 non-cash convertible-note exchange inducement charge, and higher interest expense. The effective tax rate was 39.9%, elevated in part because the inducement expense was nondeductible for U.S. tax purposes.
- Nine-month results: Sales were $1,920.9, up 0.7% reported and 0.2% core. Operating profit was $234.3 (12.2% margin), versus $231.2 (12.1%). Net income was $117.2 versus $169.6; diluted EPS was $0.66 versus $0.95. Net income comparisons also reflect 2022 discontinued-operation income of $5.1.
- Segments: Q3 SP&T sales were $399.5, up 1.0%, and operating margin was 15.4% versus 15.8%. E&C sales were $231.8, down 1.7%, and operating margin was 18.9% versus 19.0%. For nine months, SP&T sales rose 2.2% and margin fell to 15.3% from 17.2%; E&C sales fell 1.9% and margin increased to 18.0% from 17.0%.
- Cash flow and investment: Nine-month operating cash flow was $173.7, up from $72.4. Capital expenditures were $50.0. Investing cash outflow was $49.8, compared with $656.2 in 2022, when acquisitions drove substantial spending. Cash and equivalents were $824.2 at September 29, 2023, compared with $606.9 at year-end 2022.
- Debt and liquidity: Total debt carrying value was $1,496.1, compared with $1,380.7 at year-end 2022; $115.1 was current. The company refinanced its 2024 term loans with 2028 term loans and issued $500.2 principal of 1.75% convertible notes due 2028. It exchanged $401.2 principal of 2025 notes for about $403.0 cash and 8.4 million shares. The $750.0 revolving facility was undrawn, and the company reported compliance with debt covenants. Management said available liquidity should meet needs over the next 12 months and beyond.
- Balance-sheet context: Current assets were $1,640.7 and current liabilities $746.8. Stockholders’ equity was $4,293.2. Goodwill and net intangible assets totaled $4,459.6.
Material changes and management commentary
- Q3 consolidated sales were flat, but sales trends varied by market: growth in Europe was partly offset by weaker North America; SP&T also had growth in China, while E&C faced lower demand in North America and China. For nine months, management cited weaker demand in North America and China overall.
- Gross margin declined year over year, with management citing price and product mix; for the nine-month period, inflation also weighed on margin. Productivity savings partly offset these pressures. Segment margin trends diverged: SP&T faced price, mix, inflation and growth-investment pressures; E&C’s nine-month margin benefited from productivity savings and lower intangible amortization.
- Interest expense rose to $15.4 in Q3 from $11.6, and to $49.5 for nine months from $23.9, primarily due to higher rates on variable-rate borrowings and increased borrowing. The new term loans bore rates of 6.74% (U.S. dollar) and 5.05% (euro) at quarter-end.
- Management provided no specific financial guidance in the supplied filing text. It noted typical seasonality, with sales generally higher in the second half and Q4 often the strongest, particularly for E&C; it cautioned that historical patterns may not continue.
Risks, contingencies and unusual items
- Key exposures include inflation, rising interest rates, foreign-exchange movements, economic weakness affecting discretionary dental procedures, supply-chain disruptions, competition, regulation and product-development execution. Currency reduced reported sales growth by 0.8 percentage points in Q3 and 1.2 points year to date.
- China volume-based procurement policies have resulted in significant price cuts for medical and dental consumables. Russia-related volatility and the Israel-Hamas conflict could affect regional sales and operations; management said neither had materially affected overall results through the period. Israel revenue is approximately $15 annually, and the company has a production facility there.
- The company reported approximately $1.5 billion of debt. Risks include variable-rate interest costs, refinancing and debt-service needs, covenant restrictions, potential cash settlement of convertible notes, and possible shareholder dilution. The 2025 notes were classified as current because a conditional early-conversion condition was met; the 2028 notes remained long term.
- Accrued legal contingencies were $36.7 at quarter-end. Management did not expect the ultimate outcome, net of accruals, to materially affect financial position, but resolution or increased accruals could materially affect results or cash flows in a reporting period.
- Foreign-currency translation contributed a $69.6 Q3 other comprehensive loss; accumulated other comprehensive loss was $306.8 at quarter-end. This affected comprehensive income and equity, not reported Q3 net income.
Important facts for investors to verify
- Whether core-sales trends, pricing and demand by geography and segment improve or weaken, particularly in E&C and China.
- Whether gross-margin pressure from price, product mix and inflation is offset by productivity savings.
- Debt-service capacity and sensitivity to variable interest rates; conversion, refinancing and dilution terms for both convertible-note issues.
- Cash-flow sustainability, working-capital movements, and the availability and location of cash; $577.4 of the reported cash was held outside the U.S.
- Developments in legal contingencies, regional conflicts, foreign exchange, and any changes in management’s outlook or risk assessments.