Envista Holdings Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are to the periods ended July 1, 2022. Envista supplies dental implants, orthodontic products, equipment, consumables and related technologies through Specialty Products & Technologies and Equipment & Consumables.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales | $662.4 million | $645.8 million | $1,289.6 million | $1,277.2 million |
| Core sales growth | 2.1% | Not stated | (0.1)% | Not stated |
| Gross margin | 57.2% | 57.3% | 57.5% | 58.2% |
| Operating profit | $78.9 million | $65.2 million | $151.0 million | $156.7 million |
| Continuing-operations income | $51.9 million | $44.5 million | $95.7 million | $114.9 million |
| Diluted EPS, continuing operations | $0.29 | $0.25 | $0.54 | $0.64 |
| Operating cash flow | Not separately reported for the quarter | $78.2 million | $25.7 million |
- Q2 sales rose 2.6% year over year; volume increased 2.7%, while price declined 0.6%. Currency reduced reported sales growth by 1.2%. Six-month reported sales rose 1.0%, but core sales declined 0.1%.
- Q2 operating profit increased 21.0%, while six-month operating profit declined 3.6%. Q2 net income was $51.9 million versus $47.1 million, which included $2.6 million from discontinued operations. Six-month net income fell from $122.0 million, including $7.1 million of discontinued-operations income in 2022.
- Q2 gross margin was nearly flat year over year; the six-month decline reflected product mix and inflation, partly offset by productivity savings. Q2 SG&A was $272.9 million, or 41.2% of sales, versus $279.5 million, or 43.3%; R&D was $26.8 million, or 4.0% of sales.
- Segment results were mixed. Specialty Products & Technologies Q2 sales grew 2.3%, but operating margin fell to 13.4% from 18.2%; six-month margin was 15.3% versus 17.9%. Equipment & Consumables Q2 sales grew 3.1% and margin improved to 19.7% from 12.7%; six-month sales declined 2.1%, while margin rose to 17.5% from 16.0%.
Financial position, debt and liquidity
- At June 30, 2023, cash and equivalents were $651.7 million, total debt was $1,387.1 million, and stockholders’ equity was $4,311.0 million. Current assets were $1,488.9 million and current liabilities $1,150.8 million.
- Six-month operating cash flow was $78.2 million. Capital expenditures were $31.6 million; investing cash used was $24.8 million, and cash increased $44.8 million to $651.7 million.
- Debt included $648.8 million on the senior term loan, $226.8 million on the euro term loan and $511.5 million of convertible notes. The $750 million revolving facility was undrawn. Senior credit facilities mature in September 2024; the convertible notes mature in June 2025. The notes are classified as current because holders met a condition permitting early conversion.
- Variable-rate loan interest rates rose during the period: 6.44% on the term loan and 4.49% on the euro term loan at June 30, 2023. Six-month net interest expense increased to $34.1 million from $12.3 million.
- Management said available cash, operating cash flow and other liquidity sources should meet needs over the next 12 months and beyond. The company reported compliance with debt covenants at quarter-end.
Changes, outlook and risks
- Q2 performance improved at the consolidated level, but the six-month picture was weaker: core sales were slightly negative, gross and operating margins contracted, and continuing-operations income declined. Higher interest costs weighed on earnings.
- Management provided no specific numerical revenue or earnings guidance in the supplied filing text. It cited historical seasonality, with sales typically higher in the second half and Q4, particularly for Equipment & Consumables; it cautioned that these patterns are not assured.
- Management attributed results to volume, product mix, inflation, productivity savings, growth initiatives and regional demand. A $6.9 million gain on sale of an equity investment increased other income.
- Risks discussed include inflation and higher rates, foreign exchange, supply-chain disruptions, economic sensitivity of discretionary dental procedures, China’s volume-based procurement and pricing cuts, COVID-19 effects in certain markets, and potential impacts from the Russia-Ukraine conflict. Foreign customers generated 52.7% of Q2 sales; the largest customer represented 12% of sales.
- Accrued legal contingencies were $37.0 million at June 30, 2023. Management did not expect the ultimate outcome, net of accruals, to materially affect financial position, but stated that developments or higher accruals could materially affect results or cash flow in a period. No material changes to previously disclosed legal proceedings or risk factors were reported.
- The KaVo treatment unit and instrument business divestiture was completed in 2022; 2023 results contain no discontinued operations. The 2022 comparative periods included discontinued-operation income.
Important facts for investors to verify
- Whether core sales and Equipment & Consumables demand recover in the second half, and whether seasonality supports management’s liquidity and performance expectations.
- Whether inflation, product mix and pricing pressure continue to affect gross margins, particularly in Specialty Products & Technologies.
- Debt refinancing or repayment plans ahead of the September 2024 senior credit facility maturity, together with the potential cash or dilution effects of convertible-note conversion.
- Working-capital cash use, including the six-month decreases in accounts payable and accrued liabilities, and the sustainability of operating cash flow.
- Changes in legal contingency estimates, currency exposure, China pricing policies, and the effects of higher variable interest rates.