Envista Holdings Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended April 2, 2021; comparisons are with the three months ended April 3, 2020. Envista supplies dental implants, orthodontic products, equipment and consumables through Specialty Products & Technologies and Equipment & Consumables. The prior-year quarter was materially affected by COVID-19 disruptions, which affects year-over-year comparisons.
Key financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Sales | $709.2 million | $547.2 million |
| Gross profit / margin | $397.3 million / 56.0% | $278.4 million / 50.9% |
| Operating profit (loss) / margin | $108.3 million / 15.3% | ($25.0) million / (4.6)% |
| Net income (loss) | $71.7 million | ($17.2) million |
| Diluted EPS | $0.41 | ($0.11) |
| Operating cash flow | $16.6 million | ($62.3) million |
Reported sales increased 29.6%; management reported core sales growth of 29.7%, excluding currency, acquired businesses and discontinued products as defined by the company. Currency positively affected reported sales by 3.0%. Sales growth primarily reflected higher volume and product mix as more patients sought dental care. Gross and operating margin gains reflected higher volume, mix, prior restructuring and productivity savings, lower sales and marketing spending, and currency effects. SG&A fell 3.6% and R&D fell 13.3% year over year.
Segments: Specialty Products & Technologies sales were $366.5 million, up 34.4%, with operating profit of $80.5 million and a 22.0% margin (versus 2.9%). Equipment & Consumables sales were $342.7 million, up 24.8%, with operating profit of $58.6 million and a 17.1% margin (versus an operating loss and (7.0)% margin). Segment results also benefited from recovery against a COVID-affected comparison.
Balance sheet, debt and liquidity
At April 2, 2021, cash and equivalents were $441.2 million, down from $888.9 million at year-end 2020. Total debt was $1,308.6 million ($416.4 million current and $892.2 million long-term), compared with $1,794.5 million at year-end. The company repaid $472.0 million of its Euro Term Loan Facility in February; financing cash outflow was $469.6 million. Operating cash flow less $8.3 million of capital expenditures was approximately $8.3 million.
There were no borrowings on the $250 million revolving credit facility at quarter-end. Management said operating cash flow, cash and other liquidity sources were sufficient for expected needs. The company was in compliance with debt covenants. The convertible notes due 2025 are classified as short-term because a stock-price condition permitted holders to convert early; their carrying amount was $416.2 million and fair value was $1,065.3 million. Net interest expense rose to $18.0 million from $3.3 million, including $8.2 million related to the notes and higher loan costs under the amended credit agreement.
Outlook, risks and unusual items
No numerical revenue or earnings guidance is provided in the filing. Management reported continued recovery in some markets but said others remained more adversely affected. It cautioned that COVID-19’s duration, variants, practice closures, customer spending, supply availability and economic effects make the outlook uncertain. The company generally experiences stronger sales in the second half, particularly fourth-quarter equipment sales, but said pandemic conditions could alter seasonality.
- COVID-19: Potential renewed disruption, uncertain demand and delayed customer payments could adversely affect results, liquidity and receivables.
- Supply and capacity: The filing identifies a global microchip shortage affecting part of the equipment business; the impact was not yet known. Limited-source suppliers, lead times, input costs and demand shifts may disrupt production or increase inventory and costs.
- Legal contingencies: Accrued legal liabilities were $41.7 million, versus $40.6 million at year-end. Management did not expect the ultimate outcome, net of accruals, to materially affect financial position, but resolution or increased accruals could materially affect a period’s results or cash flows.
- Other items: Foreign-currency translation reduced other comprehensive income by $53.7 million. Restructuring-related charges were $8.1 million, compared with $12.3 million. The quarter’s effective tax rate was 20.9%, versus 39.0%, primarily reflecting geographic earnings mix and a lower COVID-related impact on pretax earnings.
Facts investors should verify
- How much of the 29.6% sales increase reflects sustained underlying demand versus recovery from the pandemic-affected prior-year quarter; review performance by segment and region.
- Whether margins and operating cash generation remain at improved levels as demand normalizes and seasonal patterns resume.
- The company’s liquidity and covenant position, including the short-term classification and potential conversion of the notes and the timing of debt maturities.
- Any further effects of the microchip shortage, supplier constraints or COVID-19 on equipment shipments, customer demand and working capital.
- Developments in legal contingencies and the adequacy of related accruals.