Envista Holdings Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are to the periods ended October 1, 2021. Amounts are in U.S. dollars. Envista sells dental implants, orthodontic products, equipment, software and consumables through Specialty Products & Technologies and Equipment & Consumables. Results exclude the KaVo treatment unit and instrument business, reported as discontinued operations.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales | $631.1m | $607.3m | $1,908.3m | $1,857.1m |
| Gross profit margin | 57.8% | 58.7% | 58.1% | 58.3% |
| Operating profit | $74.5m | $81.7m | $231.2m | $260.1m |
| Operating margin | 11.8% | 13.5% | 12.1% | 14.0% |
| Continuing-operations net income | $49.6m | $80.2m | $164.5m | $221.0m |
| Net income, including discontinued operations | $47.6m | $92.9m | $169.6m | $254.7m |
| Diluted EPS | $0.27 | $0.52 | $0.95 | $1.43 |
- Reported sales increased 3.9% for the quarter and 2.8% year to date. Core sales growth, a non-GAAP measure excluding acquisitions, discontinued products and foreign exchange, was 4.9% and 4.7%, respectively. Currency reduced reported sales growth by 4.1 percentage points in Q3 and 3.2 points year to date.
- Q3 Specialty Products & Technologies sales rose 8.8% to $395.4m; operating margin declined to 15.8% from 16.9%. Equipment & Consumables sales fell 3.4% to $235.7m; operating margin increased to 19.0% from 18.6%. Imaging demand was a weakness in the latter segment.
- Cash from operations was $72.4m for the first nine months, versus $225.6m a year earlier. Capital expenditures were $58.8m. Investing cash outflow was $656.2m, mainly reflecting acquisitions; financing provided $80.8m. Cash declined from $1,073.6m at year-end 2021 to $568.5m.
- At September 30, cash was $568.5m and total debt was $1,430.9m, including $579.3m classified as current; the filing reports $851.6m of long-term debt. Revolver borrowings were $70m, leaving $680m available. The company reported compliance with debt covenants and stated it expected liquidity to cover needs for the next 12 months and beyond.
- Q3 continuing-operations effective tax rate was 21.5%, compared with a tax benefit in the prior-year quarter; the nine-month rate was 21.0%, versus a prior-year benefit rate. The company attributed the change mainly to the absence of prior-year Swiss discrete tax benefits and geographic earnings mix.
Material changes and unusual items
- Two acquisitions were completed: the Carestream Dental intraoral scanner business for approximately $580.3m in April and Osteogenics for approximately $128.2m in July. Their reported revenue and earnings contributions were not material through September 30. Acquisition-related purchase accounting and expenses affected costs and margins.
- Envista received an additional $59.8m from the 2021 KaVo business divestiture, including earnout and working-capital adjustments. The divestiture generated a $5.7m gain year to date, but a $1.6m loss in Q3; discontinued operations contributed a net $5.1m year to date and a $2.0m loss in Q3.
- Operating margin pressure reflected inflation-related material costs, unfavorable foreign exchange and product mix, acquisition-related inventory fair-value amortization, and higher selling, marketing, compensation and acquisition costs. Price, volume and productivity savings partly offset these pressures.
- Foreign-currency translation drove a $247.7m nine-month other comprehensive loss, contributing to comprehensive loss of $78.1m despite net income of $169.6m.
- Adoption of convertible-debt accounting guidance increased the notes’ carrying value and adjusted equity at the start of 2022. The $517.5m principal amount of 2.375% convertible notes due 2025 is classified as current because a stock-price condition permitted early conversion. The company had no outstanding cross-currency or interest-rate swaps at quarter-end.
Outlook, commentary and risks
The filing provides no quantified financial guidance. Management described improving conditions in many markets but noted continuing COVID-related uncertainty, including potential localized restrictions in China. It identified inflation, rising interest rates, slower growth, supply-chain disruption, staffing shortages, currency movements and exposure to discretionary dental procedures as risks. The Russia-Ukraine conflict had not materially affected reported results through the period, but could affect sales, supply chains and markets. Management said the Inflation Reduction Act was not expected to have a material financial-statement impact based on its current analysis.
Envista had accrued $37.1m for certain litigation matters at September 30, 2022. Management said the ultimate outcome, net of accrued amounts, was not expected to materially affect financial position, while resolution or higher accruals could materially affect results or cash flows in a period. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor verification priorities
- Assess whether Specialty Products & Technologies growth can offset continued weakness in Equipment & Consumables, particularly imaging, and whether margin compression eases.
- Review operating cash conversion and working-capital movements: receivables and inventories used cash, while accrued expenses and other liabilities also reduced operating cash flow.
- Track acquisition integration, purchase-price allocations, synergies and the effect of acquisition-related amortization and costs on margins.
- Monitor current debt classification and potential conversion or redemption of the 2025 notes, interest-rate exposure, revolver usage and covenant headroom.
- Evaluate foreign-exchange effects, China/COVID restrictions, inflation and supply-chain risks, and developments in litigation contingencies.