Envista Holdings Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended July 3, 2020; comparisons are to periods ended June 28, 2019. Envista supplies dental implants, orthodontic products, equipment and consumables through Specialty Products & Technologies and Equipment & Consumables. Prior-period financials are combined results from before the company’s 2019 separation from Danaher, so they may not be fully comparable with post-separation results.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $362.0 million | $712.1 million | $909.2 million | $1,371.8 million |
| Gross margin | 41.6% | 55.3% | 47.2% | 55.2% |
| Operating income (loss) | $(107.9) million | $75.9 million | $(132.9) million | $120.8 million |
| Net income (loss) | $(93.5) million | $61.5 million | $(110.7) million | $99.4 million |
| Diluted EPS | $(0.59) | $0.48 | $(0.69) | $0.78 |
| Operating cash flow | Not separately presented for the quarter | $(57.6) million | $112.7 million |
Q2 sales fell 49.2%; six-month sales fell 33.7%. Core sales, excluding acquisitions, discontinued products and currency effects, declined 46.2% in Q2 and 31.0% for the first half. Q2 operating margin was negative 29.8%, versus positive 10.7% a year earlier.
At July 3, cash and equivalents were $822.4 million, total current assets $1.518 billion and current liabilities $830.2 million. Total debt carrying value was $1.976 billion, including $253.5 million classified as current; long-term debt was $1.722 billion. The revolver was fully drawn. The filing reports approximately $2.1 billion of outstanding indebtedness on a principal-value basis.
Changes and drivers
- COVID-19 was the principal driver of the deterioration: dental practices closed or restricted services, and reopened practices remained below pre-pandemic patient volumes. Both segments experienced sharp sales declines.
- Specialty Products & Technologies sales were $184.6 million in Q2, down 46.8%; operating loss was $19.2 million. Equipment & Consumables sales were $177.4 million, down 51.4%; operating loss was $53.8 million.
- Lower sales, unfavorable product mix, excess-capacity costs, restructuring charges and currency effects pressured gross and operating margins. Furloughs, pay reductions, lower discretionary spending and other cost actions partly offset these effects.
- Six-month operating cash flow was negative, compared with positive cash flow in the prior-year period. Cash increased to $822.4 million primarily through financing, including the revolver draw and convertible-note issuance—not operating cash generation.
Outlook, financing, risks and unusual items
- Management gave no quantified revenue or earnings guidance. It said COVID-19 made near- to medium-term performance difficult to estimate and expected the second quarter to be the period most significantly affected. Practice reopening and patient volumes remained uncertain.
- Management stated that cash, operating cash flow and available funding were expected to support requirements for at least the next 12 months, while warning that pandemic-related market conditions could constrain future financing. It was accelerating spending reductions expected to be substantially completed by year-end 2020.
- In May, lenders waived the quarterly leverage covenant and reduced the interest coverage requirement through Q1 2021. The amendment also requires monthly minimum liquidity of $125 million, grants lenders a first-priority security interest in substantially all assets, imposes operating restrictions and increases borrowing costs during the waiver period. The company reported covenant compliance at July 3.
- Envista issued $518 million principal amount of 2.375% convertible senior notes due 2025, receiving $503 million net proceeds. The initial conversion price is approximately $21.01 per share. Capped calls, costing about $21 million, are intended to limit dilution up to a stated cap price of $23.79 per share.
- Q2 restructuring-related charges were $59.9 million; six-month charges were $72.2 million. The planned exit of part of the treatment-unit business generated a reported $19 million non-cash loss, including intangible-asset impairment and inventory write-offs. The exit was expected to be substantially complete by the end of Q3.
- Envista acquired Matricel GmbH for approximately $44 million in January; its reported-period revenue and earnings were not material. Legal contingency accruals were $92 million at July 3; the filing notes that resolution or increased accruals could materially affect a period’s results or cash flows. A Nobel Biocare arbitration remained pending, with a further liability ruling expected around November 2020 and a damages award not expected until November 2021.
- Other risks include delayed customer payments, supply-chain disruption, uncertain demand, covenant compliance and potential future goodwill impairment. Management reported no goodwill impairment trigger at July 3.
Investor verification points
- Track dental-practice reopening and patient volumes, and whether revenue and core sales recover across both segments and geographies.
- Assess whether cost reductions and restructuring improve margins without impairing capacity, product development or growth initiatives.
- Monitor operating cash generation, receivable collections, liquidity covenant headroom, debt service and compliance with amended credit terms.
- Review the treatment-unit exit costs and completion, and whether the legal accrual remains adequate as the arbitration and other matters develop.
- Consider the convertible notes’ cash-settlement requirements, potential dilution and capped-call coverage, as well as the comparability limits of pre-separation results.