Envista Holdings Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended April 3, 2020; comparable period ended March 29, 2019. Envista provides dental implants, orthodontic products, equipment and consumables through Specialty Products & Technologies and Equipment & Consumables. The prior-period figures are combined results from before the Company’s separation from Danaher, so comparisons may be affected by the change in reporting basis.
Financial performance
| Metric | Q1 2020 | Prior comparable period |
|---|---|---|
| Sales | $547.2 million | $659.7 million |
| Gross profit / margin | $278.4 million / 50.9% | $363.1 million / 55.0% |
| Operating income (loss) / margin | $(25.0) million / (4.6)% | $44.9 million / 6.8% |
| Net income (loss) | $(17.2) million | $37.9 million |
| Diluted earnings (loss) per share | $(0.11) | $0.30 |
| Cash from operating activities | $(62.3) million | $(9.0) million |
Sales declined 17.1% year over year; non-GAAP core sales declined 14.6%, including an estimated approximately 16% decline attributable to COVID-19. Gross margin fell 4.1 percentage points. Cost of sales was 49.1% of sales versus 45.0%; SG&A was $268.7 million and R&D was $34.7 million. Interest expense was $3.3 million, and the effective tax rate was 39.0% versus 15.8%.
Cash and equivalents were $353.6 million at April 3, 2020, up from $211.2 million at year-end. Total debt was $1,550.2 million, including a fully drawn $249.8 million revolving facility; long-term debt was $1,546.7 million. Net cash used in investing activities was $51.4 million, including $41.6 million for acquisitions and $13.6 million in capital expenditures. Financing activities provided $258.5 million, principally from drawing the revolver.
Segment results and material changes
- Specialty Products & Technologies: Sales were $272.6 million, down 21.8%; core sales declined 19.4%. Operating profit was $7.8 million versus $66.1 million, and margin fell to 2.9% from 19.0%.
- Equipment & Consumables: Sales were $274.6 million, down 11.7%; core sales declined 9.2%. Operating loss was $19.3 million versus $12.2 million, and loss margin widened to 7.0% from 3.9%.
- Sales declined across regions, particularly in Western Europe, North America and China. The largest product-group decline was consumables, with sales of $377.9 million versus $460.8 million; equipment sales were $169.3 million versus $198.9 million.
- Comprehensive loss was $62.9 million, including $45.7 million of other comprehensive loss, primarily foreign-currency translation and cash-flow hedge adjustments.
Outlook, risks and unusual items
- Management said COVID-19 closures and deferral of elective dental procedures significantly reduced demand; core sales had grown at a mid-single-digit rate during the first two months of the quarter before the disruption. Management expected Q2 2020 to be the most significantly affected quarter, but said the duration and financial impact could not be reliably predicted. No quantified full-year guidance was provided.
- The Company reduced manufacturing capacity and implemented furloughs, pay reductions, discretionary-spending cuts and delayed capital expenditure. It accelerated planned structural cost reductions, which it expected to substantially complete by year-end 2020. Lower production utilization could further pressure gross margin.
- On May 6, 2020, after quarter-end, Envista amended its credit agreement: the quarterly leverage covenant was waived and the interest coverage covenant reduced through Q1 2021. Lenders received a first-priority security interest in substantially all assets; the Company must maintain minimum liquidity of $125 million, tested monthly, and faces higher interest and fees while the waiver applies. Fees were $3 million.
- Subsequent to quarter-end, the Company committed to exit part of its treatment-unit business. It preliminarily estimated a $19–$24 million impairment charge and $8–$10 million of severance and other exit charges in the quarter ending July 3, 2020.
- Q1 restructuring and productivity charges were $12.3 million, versus $2.0 million. Envista acquired Matricel GmbH for approximately $45 million; its Q1 contribution was not material. The allowance for credit losses rose to $26.6 million from $22.8 million, with management citing uncertainty around COVID-related customer payment delays.
- Accrued legal reserves were $81 million at April 3, 2020. The Company reported compliance with debt covenants at quarter-end, before the subsequent amendment. Management stated that cash, operating cash flow and financing sources were expected to cover needs for at least the next 12 months, while warning that the pandemic could impair cash flow and access to financing.
Key facts for investors to verify
- How quickly dental practices resumed elective procedures, and whether demand and customer payments recovered as expected.
- Compliance with the amended credit agreement, including the $125 million minimum-liquidity test, and the cost and duration of covenant relief.
- The final impairment and restructuring charges from the treatment-unit exit and any further goodwill or intangible-asset impairment assessments.
- Whether cost reductions offset lower production utilization and additional costs as a standalone public company.
- Comparability of per-share results: the share count and reporting basis differ from the pre-separation 2019 period.