Envista Holdings Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended April 1, 2022, compared with the three months ended April 2, 2021. Envista supplies dental implants, orthodontic products, equipment, consumables and related technology. Results reflect continuing operations unless noted; the KaVo treatment unit and instrument business is presented as discontinued operations.
Financial performance
| Metric | Q1 2022 | Prior period |
|---|---|---|
| Sales | $631.4 million | $612.6 million |
| Gross profit / margin | $374.1 million / 59.2% | $358.4 million / 58.5% |
| Operating profit / margin | $91.5 million / 14.5% | $95.1 million / 15.5% |
| Income from continuing operations | $70.4 million | $61.8 million |
| Net income, including discontinued operations | $74.9 million | $71.7 million |
| Diluted EPS | $0.42 | $0.41 |
| Operating cash flow | $3.5 million | $16.6 million |
| Capital expenditures | $19.8 million | $8.3 million |
Reported sales grew 3.1%; management’s non-GAAP core sales growth was 5.4%, excluding a 2.3% adverse foreign-exchange impact. Gross margin improved, but operating margin declined as SG&A rose 8.7% to $258.2 million, including higher sales, marketing and compensation costs. Net interest expense fell to $5.9 million from $18.0 million, supporting higher continuing-operations income. Cash from operations was lower primarily due to higher payments of accrued liabilities; operating cash flow less capital expenditures was negative $16.3 million.
Segments and material changes
- Specialty Products & Technologies: Sales of $397.1 million, up 8.3% reported and 11.2% core; operating profit was $70.3 million versus $78.4 million, and margin was 17.7% versus 21.4%. Management cited demand recovery in implants and orthodontics, while higher selling and marketing costs, compensation, unfavorable mix and inflation pressured margin.
- Equipment & Consumables: Sales of $234.3 million, down 4.8% reported and 3.3% core; operating profit was $45.5 million versus $45.0 million, and margin improved to 19.4% from 18.3%. Lower infection-prevention demand weighed on sales; imaging and restorative products partly offset the decline.
- Foreign exchange negatively affected reported sales by 2.3%. Foreign-currency translation losses contributed to a $58.3 million other comprehensive loss.
- Q1 2021 included the full KaVo business; Q1 2022 discontinued-operations results relate to the remaining jurisdictions and include a $4.6 million gain on sale. The company received a $30.0 million earnout payment in Q1 2022. Transfers of the remaining assets in Russia, China and Brazil had not closed by April 1; closures were expected at various points in 2022.
Liquidity, debt and other key items
At April 1, 2022, cash and cash equivalents were $1,078.3 million, total debt carrying value was $1,384.7 million, and current liabilities were $1,255.7 million. Debt included $507.8 million of convertible notes classified as current and $876.9 million of long-term debt. No borrowings were outstanding under the $750 million revolving credit facility, and Envista reported compliance with its debt covenants. The company said it expected available cash, operating cash flow and credit availability to meet liquidity needs over the next 12 months and beyond.
On April 20, 2022, after quarter-end, Envista completed its acquisition of Carestream Dental’s intraoral scanner business for approximately $582.5 million, subject to customary adjustments. The company adopted convertible-debt accounting guidance effective January 1, 2022; adoption increased the notes’ carrying value by $75.0 million and included an opening retained-earnings adjustment.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management described continued recovery in some markets but highlighted COVID-19-related lockdowns in Shanghai late in the quarter, which affected China operations. It also cited supply-chain disruptions, inflation, higher prices and shortages of some petroleum-based supplies, chemicals and microchips, as well as potential impacts from the Russia-Ukraine conflict. The company noted that the first quarter is typically its lowest-sales quarter and that sales generally skew toward the second half, particularly in Equipment & Consumables; these historical patterns are not assured.
Envista had accrued $41.0 million for certain litigation matters. Management did not expect the ultimate outcome, net of accruals, to materially affect financial position, but said resolution or increased accruals could materially affect results or cash flows in a period. The filing also identifies foreign-exchange, customer-demand, supplier-concentration, regulatory, acquisition-integration and international-market risks.
Important facts for investors to verify
- Whether core sales momentum continues, particularly in Specialty Products & Technologies, and whether operating margins recover from the Q1 decline.
- How prolonged China restrictions, supply constraints, inflation and currency movements affect sales, costs and delivery capabilities.
- The funding and integration effects of the approximately $582.5 million Carestream scanner acquisition, and its contribution to growth and returns.
- Timing and final proceeds or gains from the remaining KaVo asset transfers, which had not closed as of April 1, 2022.
- Cash conversion and working-capital trends, along with debt classification and potential conversion or dilution associated with the 2025 convertible notes.
- Changes in litigation exposure relative to the $41.0 million accrued balance and any impact on cash flows.