Envista Holdings Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter ended July 1, 2022; comparative quarter ended July 2, 2021. Unless otherwise noted, amounts are U.S. dollars.
Business context and period
Envista supplies dental implants, orthodontic products, dental equipment and consumables through Specialty Products & Technologies (SP&T) and Equipment & Consumables (E&C). Results exclude the KaVo treatment unit and instrument business, sold in December 2021 and reported as discontinued operations.
Key financial results
- Q2 sales: $645.8 million, up 1.3% reported year over year; core sales grew 4.0%. Foreign exchange reduced reported growth by 3.6 percentage points, while the acquisition effect was negative 0.9 points.
- Q2 profitability: Gross profit was $369.8 million and gross margin 57.3% (57.8% prior year). Operating profit was $65.2 million, down 21.7%, with a 10.1% margin (13.1%). Continuing-operations income was $44.5 million versus $79.0 million; diluted continuing-operations EPS was $0.25 versus $0.44. Net income was $47.1 million versus $90.1 million.
- First six months: Sales were $1,277.2 million, up 2.2% reported and 4.7% core. Gross margin was 58.2%, unchanged; operating profit was $156.7 million, down 12.2%, at a 12.3% margin versus 14.3%. Continuing-operations income was $114.9 million versus $140.8 million; diluted continuing-operations EPS was $0.64 versus $0.79.
- Segments, Q2: SP&T sales rose 5.6% to $407.7 million; operating margin was 18.2% versus 18.6%. E&C sales fell 5.1% to $238.1 million; operating margin was 12.7% versus 16.2%. E&C weakness reflected lower demand for imaging, infection-prevention and restorative products.
- Cash flow: Operating cash flow for the first six months was $25.7 million, down from $137.3 million. Investing cash outflow was $586.5 million, including the scanner-business acquisition; financing cash inflow was $7.1 million. Cash declined to $523.1 million from $1,073.6 million at year-end.
- Debt and liquidity: Total debt was $1,372.7 million, including $508.6 million of convertible notes classified as short-term and $864.1 million of long-term debt. Cash was $523.1 million; no revolving-credit borrowings were outstanding, with $750 million committed. The company reported compliance with debt covenants and said liquidity was sufficient for needs over the next 12 months and beyond.
Material changes and unusual items
- On April 20, Envista acquired Carestream Dental’s intraoral scanner business for $580.0 million, including $7.5 million contingent consideration. The business’s Q2 contribution was not material. Acquisition-related professional fees were $8.2 million in Q2 and $10.7 million for the six months.
- On July 5, after quarter-end, Envista acquired Osteogenics for approximately $129.4 million, subject to customary adjustments.
- Adoption of convertible-debt accounting guidance increased the notes’ carrying value by $75.0 million and reduced opening additional paid-in capital by $77.8 million; opening retained earnings increased $21.4 million. This change also contributed to lower reported interest expense.
- The KaVo divestiture generated a $30.0 million earnout payment during the first half and a $7.3 million gain on sale in discontinued operations. Remaining local closings were expected during 2022.
- Foreign-currency translation losses were $72.9 million in Q2 and $132.5 million for the first half, contributing to comprehensive losses of $25.4 million and $8.8 million, respectively.
- Legal contingencies accrued were $39.4 million at July 1. Management stated that outcomes beyond accrued amounts were not expected to materially affect financial position, but resolution or increased accruals could materially affect results or cash flow in a period.
Management commentary, outlook and risks
Management attributed margin pressure to higher sales and marketing and acquisition costs, restructuring, unfavorable foreign exchange, and inflation-related material costs. Pricing and productivity savings provided partial offsets. Management described recovery in many markets but noted that Shanghai-area COVID-19 restrictions affected China in the first half; restrictions lifted in early June, while further effects remained uncertain. The Russia-Ukraine conflict had not materially affected reported results through July 1, but could affect sales, supply chains, currencies and markets.
The filing provides no quantified earnings or revenue guidance. Management noted that sales have historically been higher in the second half, particularly Q4, but said the trend is not assured and could be affected by COVID-19. Other risks include inflation, slowing growth, supply-chain disruption, staffing shortages, currency movements, discretionary dental demand, acquisition integration and litigation.
Important facts for investors to verify
- Whether E&C demand stabilizes and whether SP&T growth continues to offset E&C declines.
- Whether cash generation recovers after weak first-half operating cash flow and substantial acquisition spending.
- The effects of inflation, foreign exchange and restructuring on margins and the ability to sustain productivity savings.
- Integration, performance and purchase-accounting outcomes for the Carestream scanner and Osteogenics acquisitions.
- Timing and financial impact of remaining KaVo local closings, convertible-note classification and conversion exposure, and legal contingencies.