Envista Holdings Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended October 2, 2020. Envista supplies dental implants, orthodontic products, equipment and consumables through its Specialty Products & Technologies and Equipment & Consumables segments. The company was separated from Danaher in 2019; accordingly, prior-period results include pre-separation combined reporting.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $640.5 million | $659.3 million | $1,549.7 million | $2,031.1 million |
| Gross margin | 53.2% | 55.7% | 49.7% | 55.3% |
| Operating profit (loss) | $69.4 million | $78.7 million | $(63.5) million | $199.5 million |
| Operating margin | 10.8% | 11.9% | (4.1)% | 9.8% |
| Net income (loss) | $35.6 million | $62.1 million | $(75.1) million | $161.5 million |
| Diluted EPS | $0.22 | $0.48 | $(0.47) | $1.25 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $90.5 million | $210.5 million |
Q3 GAAP sales fell 2.9%; non-GAAP core sales declined 1.2%, excluding acquisitions, discontinued products and currency effects. For the first nine months, GAAP sales fell 23.7% and core sales declined 21.3%. Management attributed the contraction primarily to COVID-19-related dental practice closures and reduced patient volumes. Most practices had reopened by October 2, but patient volumes remained below pre-pandemic levels.
Q3 sales were $316.9 million in Specialty Products & Technologies (down 0.3%) and $323.6 million in Equipment & Consumables (down 5.2%). Segment operating margins were 13.6% and 13.9%, respectively, versus 17.2% and 9.1% a year earlier. For the nine months, segment margins were 4.1% and (3.6%), respectively. Consumables sales increased year over year in Q3, supported partly by disinfectant products; equipment sales remained weaker.
Balance sheet, cash flow and debt
- Cash and equivalents were $700.8 million at October 2, 2020, versus $211.2 million at December 31, 2019. Current assets were $1.416 billion and current liabilities $678.9 million.
- Total debt was $1.759 billion, including $1.755 billion long-term debt; long-term debt had been $1.321 billion at year-end 2019. The company reported no revolver borrowings at quarter-end and $250 million of revolving capacity.
- Nine-month operating cash flow was $90.5 million, down from $210.5 million. Investing cash outflow was $64.0 million, including the Matricel acquisition; financing cash inflow was $488.7 million, principally reflecting convertible-note proceeds. Ending cash was $700.8 million.
- On May 21, Envista issued $517.5 million principal amount of 2.375% convertible senior notes due 2025, receiving $502.6 million net proceeds. The notes’ carrying amount was $406.1 million; disclosed fair value was $717.2 million.
- A May credit-agreement amendment waived the quarterly leverage covenant and reduced the interest-coverage requirement through Q1 2021, while imposing a $125 million monthly minimum-liquidity covenant during the waiver period. Lenders received a first-priority security interest in substantially all assets; the company reported compliance with applicable covenants at October 2.
Material changes, outlook and risks
- COVID-19 materially reduced demand and drove temporary facility idling, furloughs, pay reductions, discretionary-spending cuts and delayed capital expenditures. Management said it expected accelerated structural spending reductions to be substantially completed by year-end 2020.
- Restructuring charges were $99.9 million for the first nine months, including $27.7 million in Q3. The company also recorded a $19.3 million non-cash loss in Q2 associated with exiting part of the treatment-unit business and a further $10.0 million non-cash loss in Q3, primarily relating to long-lived assets.
- Management stated that cash, operating cash flow and available revolver capacity were expected to be adequate for debt service and operating needs for at least the next 12 months. It gave no quantified sales or earnings guidance and emphasized uncertainty around the duration and financial effects of the pandemic.
- Key risks include renewed practice closures or persistently low patient volumes, delayed customer payments, supply-chain disruption, fixed manufacturing costs, access to financing, covenant compliance, foreign exchange exposure and the possibility that restructuring harms capacity or growth. The company also anticipated a possible hard Brexit after the transition period ending December 31, 2020.
- Envista had accrued $92.8 million for legal matters. A Nobel Biocare arbitration involving alleged royalty and contract breaches remained ongoing; a ruling on open liability issues was expected around November 2020 and a damages award was not expected until November 2021. Management said the ultimate outcome of legal proceedings, net of accruals, was not expected to materially affect financial position, but a resolution or higher accrual could materially affect a period’s results or cash flows.
Important facts for investors to verify
- Whether dental patient volumes and demand recovered further after quarter-end, and how that affected Q4 sales and margins.
- Progress and cash costs of restructuring, including whether targeted savings were realized without impairing manufacturing capacity or product development.
- Liquidity-covenant headroom and the timing and conditions for the original credit covenants to resume.
- Debt service burden, including convertible-note accounting expense and potential conversion dilution; capped calls mitigate potential dilution only up to their stated cap price.
- Updates to the $92.8 million legal accrual and developments in the Nobel Biocare arbitration.