Envista Holdings Corporation — Q1 2023 Form 10-Q
Business and reporting period: Envista supplies dental implants, orthodontic products, equipment, software and consumables through Specialty Products & Technologies (SP&T) and Equipment & Consumables (E&C). This unaudited report covers the three months ended March 31, 2023; comparisons are with the three months ended April 1, 2022. Unless noted, amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2023 | Comparable 2022 period |
|---|---|---|
| Sales | $627.2 million | $631.4 million |
| Gross profit / gross margin | $362.7 million / 57.8% | $374.1 million / 59.2% |
| Operating profit / operating margin | $72.1 million / 11.5% | $91.5 million / 14.5% |
| Net income | $43.8 million | $74.9 million |
| Diluted EPS | $0.25 | $0.42 |
| Operating cash flow | $3.1 million | $3.5 million |
- Sales declined 0.7%; reported sales included a 3.3% reduction from acquisition-related comparison effects and a 1.6% benefit from currency. Core sales, the company’s non-GAAP measure excluding acquisitions and currency effects, declined 2.4%.
- Cost of sales rose 2.8% while sales fell. Gross-margin pressure reflected lower volume, unfavorable product mix and inflation, partly offset by productivity savings. SG&A increased 3.1%, including higher compensation and intangible amortization; R&D was nearly unchanged at $24.5 million.
- Net interest expense rose to $16.7 million from $5.9 million, mainly because of higher rates on variable-rate borrowings. The effective tax rate was 21.4%, versus 18.0%.
- Cash and cash equivalents were $585.2 million at March 31, 2023, down from $606.9 million at year-end 2022. Capital expenditures were $17.5 million; operating cash flow less capital expenditures was negative $14.4 million. Investing cash outflow was $22.0 million.
- Total debt was $1,384.6 million, including $510.8 million of convertible notes classified as current and $873.8 million of long-term debt. The $750 million revolving facility had no borrowings outstanding. Cash exceeded reported debt by approximately $799 million.
- The company reported $1,414.3 million in current assets and $1,149.6 million in current liabilities. Management said available liquidity was sufficient for cash needs over the next 12 months and beyond.
Material changes and segment results
- SP&T: Sales increased 3.2% to $410.0 million; core sales grew 3.0%. Operating profit was $71.1 million, with margin of 17.3% versus 17.7%. Higher volume supported sales, while unfavorable mix, inflation and growth investments weighed on margin.
- E&C: Sales declined 7.3% to $217.2 million; core sales fell 11.7%. Operating profit declined to $32.5 million, and margin fell to 15.0% from 19.4%. Lower volume, higher amortization and material costs pressured performance.
- Reported net income was also affected by the prior-year period’s $4.5 million of income from discontinued operations related to the KaVo treatment unit and instrument business divestiture. All deferred local closings were completed by year-end 2022; no discontinued-operation income was reported in Q1 2023.
- The 2022 acquisitions of Carestream Dental’s intraoral scanner business and Osteogenics are reflected in the current business. Goodwill was $3,506.4 million at quarter-end.
Outlook, risks and contingencies
- The filing provides no specific financial guidance or forecast. Management describes seasonality, with sales generally higher in the second half and E&C profitability typically stronger later in the year; it cautions that historical patterns may not continue.
- Management cited inflation, rising interest rates, foreign-exchange movements, slower growth, supply-chain disruption and consumer sensitivity for discretionary dental procedures. Currency reduced reported sales by 1.6% year over year; further U.S. dollar strengthening could weigh on sales and results.
- China’s volume-based procurement policies have caused significant price reductions for dental and medical consumables. Some markets continued to experience COVID-19 effects; the company also cited potential consequences of the Russia-Ukraine war, including sales, cyber, supply-chain and currency risks.
- Accrued legal contingencies were $36.8 million. Management does 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.
- Senior Credit Facilities mature in September 2024 and require leverage and interest-coverage covenant compliance; the company reported compliance at March 31, 2023. The convertible notes mature in June 2025 but were classified as current because a stock-price condition permitted early conversion. The term loans carry variable rates.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It said there were no material changes to the risk factors disclosed in the 2022 Form 10-K.
Important facts for investors to verify
- Whether E&C’s volume and margin declines persist, and whether SP&T growth can offset them.
- How variable-rate debt costs and the September 2024 credit-facility maturity affect interest expense, refinancing needs and liquidity.
- Whether operating cash generation improves, given low quarterly operating cash flow and capital spending.
- The treatment and potential dilution implications of the convertible notes, including their early-conversion status and capped-call protection.
- Developments in accrued litigation, China pricing policies, inflation, foreign exchange, supply chains and geopolitical risks.
- Core sales is a company-defined non-GAAP measure; compare it alongside GAAP sales and review the filing’s reconciliation and definitions.