UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2023
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to | |||||
Commission File Number: 001-39054
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||||||||
| (Address of Principal Executive Offices) | (Zip Code) | ||||||||||
Registrant’s telephone number, including area code: 714 -817-7000
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated Filer | ☐ | |||||||||||||||
| Non-accelerated Filer | ☐ | Smaller Reporting company | |||||||||||||||
| Emerging Growth Company | |||||||||||||||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of common stock outstanding as of April 28, 2023, was 163,702,043 .
TABLE OF CONTENTS
| PART I. FINANCIAL INFORMATION | ||||||||
| PAGE | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENVISTA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
($ in millions, except share amounts)
| As of | |||||||||||
| March 31, 2023 | December 31, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Trade accounts receivable, less allowance for credit losses of $ | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other long-term assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt | $ | $ | |||||||||
| Trade accounts payable | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Long-term debt | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $ | |||||||||||
Common stock - $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
1
ENVISTA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
($ and shares in millions, except per share amounts)
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Sales | $ | $ | |||||||||
| Cost of sales | |||||||||||
| Gross profit | |||||||||||
| Operating expenses: | |||||||||||
| Selling, general and administrative | |||||||||||
| Research and development | |||||||||||
| Operating profit | |||||||||||
| Nonoperating income (expense): | |||||||||||
| Other income | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| Income before income taxes | |||||||||||
| Income tax expense | |||||||||||
| Income from continuing operations, net of tax | |||||||||||
| Income from discontinued operations, net of tax (Note 3) | |||||||||||
| Net income | $ | $ | |||||||||
| Earnings per share: | |||||||||||
| Earnings from continuing operations - basic | $ | $ | |||||||||
| Earnings from continuing operations - diluted | $ | $ | |||||||||
| Earnings from discontinued operations - basic | $ | $ | |||||||||
| Earnings from discontinued operations - diluted | $ | $ | |||||||||
| Earnings - basic | $ | $ | |||||||||
| Earnings - diluted | $ | $ | |||||||||
| Average common stock and common equivalent shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
2
ENVISTA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
($ in millions)
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Net income | $ | $ | |||||||||
| Other comprehensive income (loss), net of income taxes: | |||||||||||
| Foreign currency translation adjustments | ( | ||||||||||
| Cash flow hedge adjustments | |||||||||||
| Pension plan adjustments | ( | ( | |||||||||
| Total other comprehensive income (loss), net of income taxes | ( | ||||||||||
| Comprehensive income | $ | $ | |||||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
3
ENVISTA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
($ in millions)
| Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Envista Equity | ||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Common stock-based award activity | — | — | — | |||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||
| Three Months Ended April 1, 2022 | |||||||||||||||||||||||||||||||||||
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Envista Equity | Noncontrolling Interests | ||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
| — | ( | — | ( | — | |||||||||||||||||||||||||||||||
| Balance, January 1, 2022 | ( | ||||||||||||||||||||||||||||||||||
| Change in noncontrolling interest | — | — | — | — | — | ( | |||||||||||||||||||||||||||||
| Common stock-based award activity | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | ( | — | |||||||||||||||||||||||||||||
| Balance, April 1, 2022 | $ | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
4
ENVISTA HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
($ in millions)
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Noncash items: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Allowance for credit losses | |||||||||||
| Stock-based compensation expense | |||||||||||
| Gain on sale of property, plant and equipment | ( | ||||||||||
| Restructuring charges | ( | ||||||||||
| Impairment charges | |||||||||||
| Amortization of right-of-use assets | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Change in trade accounts receivable | ( | ( | |||||||||
| Change in inventories | ( | ( | |||||||||
| Change in trade accounts payable | ( | ( | |||||||||
| Change in prepaid expenses and other assets | ( | ||||||||||
| Change in accrued expenses and other liabilities | ( | ( | |||||||||
| Change in operating lease liabilities | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Payments for additions to property, plant and equipment | ( | ( | |||||||||
| Proceeds from sale of KaVo treatment unit and instrument business, net | |||||||||||
| All other investing activities, net | ( | ( | |||||||||
| Net cash (used in) provided by investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from borrowing | |||||||||||
| Repayment of borrowing | ( | ||||||||||
| Proceeds from stock option exercises | |||||||||||
| Tax withholding payment related to net settlement of equity awards | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Net change in cash and cash equivalents | ( | ||||||||||
| Beginning balance of cash and cash equivalents | |||||||||||
| Ending balance of cash and cash equivalents | $ | $ | |||||||||
| Supplemental data: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for taxes | $ | $ | |||||||||
| ROU assets obtained in exchange for operating lease obligations | $ | $ | |||||||||
See the accompanying Notes to the Condensed Consolidated Financial Statements.
5
ENVISTA HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Business Overview
The Company provides products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile. The Company is a worldwide provider of a broad range of dental implants, orthodontic appliances, general dental consumables, equipment and services and is dedicated to driving technological innovations that help dental professionals improve clinical outcomes and enhance productivity.
The Company operates in two business segments: Specialty Products & Technologies and Equipment & Consumables.
The Company’s Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, including regenerative solutions, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products. The Company’s Equipment & Consumables segment develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; endodontic systems and related consumables; and restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
Basis of Presentation
All revenues and costs as well as assets and liabilities directly associated with the business activity of the Company are included in the financial statements. All significant intercompany accounts and transactions between the businesses comprising the Company have been eliminated in the accompanying Condensed Consolidated Financial Statements.
The Condensed Consolidated Financial Statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying Condensed Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments and reclassifications to conform to current year presentation) necessary to present fairly the financial position of the Company as of March 31, 2023 and December 31, 2022, and its results of operations and cash flows for the three month periods ended March 31, 2023 and April 1, 2022. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Consolidated Financial Statements and accompanying notes for the three years ended December 31, 2022, included in the Annual Report on Form 10-K filed by the Company with the SEC on February 16, 2023.
As discussed in Note 3, Discontinued Operations, on December 31, 2021, the Company sold substantially all of its KaVo dental treatment unit and instrument business (the "KaVo Treatment Unit and Instrument Business"), which was part of the Company’s Equipment and Consumables segment. However, the transfer of assets in certain countries was not executed and closed until 2022 (“Deferred Local Closing”). As a result, the financial results related to the Deferred Local Closing countries were reported as discontinued operations and all segment information and descriptions exclude the activity related to those countries for the three months ended April 1, 2022. As of December 31, 2022, all Deferred Local Closings were completed and therefore there is no discontinued operations activity reported for the three months ended March 31, 2023.
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the novel coronavirus (“COVID-19”) pandemic.
The extent of the impact of the COVID-19 pandemic on the Company remains uncertain and difficult to predict because of the dynamic and evolving nature of the situation. The global impact of the outbreak continues to adversely affect many industries, and different geographies continue to reflect the effects of public health restrictions in various ways. The economic recovery following the impact of the COVID-19 pandemic is only partially underway and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with uncertainty regarding its ultimate length and trajectory. During the three months ended March 31, 2023, notwithstanding improvement in many markets in which the Company operates due to a return to more normalized business operations, certain markets continued to be adversely impacted by COVID-19.
6
In addition, Russia’s invasion of Ukraine and the global response to this invasion, including sanctions imposed by the U.S. and other countries, could have an adverse impact on the Company’s business, including impacting the Company’s ability to market and sell products in the affected regions, potentially heightening the risk of cyber security attacks, impacting its ability to enforce its intellectual property rights in Russia, creating disruptions in the global supply chain, and by potentially having an adverse impact on the global economy, financial markets, energy markets, currency rates and otherwise.
NOTE 2. ACQUISITIONS
The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into new and attractive business areas. The Company has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Company’s Condensed Consolidated Financial Statements. Among other things, goodwill arises because the purchase prices for these businesses reflect a number of factors including the future earnings and cash flow potential of these businesses, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which the Company acquired the businesses, avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance the Company’s existing product offerings to key target markets and enter into new and profitable businesses and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
The Company makes an initial allocation of the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. The Company obtains this information during due diligence and through other sources. For those assets and liabilities that were accounted for on a preliminary basis, the Company may up to 12 months after closing, refine the estimates of fair value and more accurately allocate the purchase price. Only items that existed as of the acquisition date are considered for subsequent adjustment.
During the year ended December 31, 2022, the Company completed the following acquisitions which were accounted for under Accounting Standards Codification 805 Business Combinations using the acquisition method of accounting:
Osteogenics Biomedical Inc., Allotech LLC and OBI Biologics, Inc.
On July 5, 2022, the Company acquired all of the equity of Osteogenics Biomedical Inc., Allotech LLC and OBI Biologics, Inc. (together "Osteogenics") for total consideration of approximately $128.2 million, subject to certain customary adjustments as provided in the Equity Purchase Agreement dated May 17, 2022. Osteogenics develops innovative regenerative solutions for periodontists, oral and maxillofacial surgeons, and clinicians involved in implant dentistry throughout the world, and is part of the Company’s Specialty Products & Technologies segment. The finalization of the acquisition valuation assessment for Osteogenics may result in a change in the valuation of deferred taxes and goodwill, which could have a material impact on the Company’s financial statements.
7
Carestream Dental Technology Parent Limited’s Intraoral Scanner Business
On April 20, 2022, the Company completed the acquisition of Carestream Dental Technology Parent Limited’s (“Carestream Dental”) intraoral scanner business (the “Intraoral Scanner Business”) for total consideration of $580.3 million, including contingent consideration of $7.5 million, and subject to certain customary adjustments as provided in the Stock and Asset Purchase Agreement dated December 21, 2021 and as subsequently amended by the closing agreement dated as of April 20, 2022 (together, the “IOS Purchase Agreement”). The Intraoral Scanner Business manufactures, markets, sells, commercializes, distributes, services, trains, supports, and maintains operations of intraoral scanners and software, and is part of the Company’s Equipment & Consumables segment. The Company purchased the Intraoral Scanner Business through the acquisition of certain assets and the assumption of certain liabilities as well as the acquisition of all of the equity of certain subsidiaries of Carestream Dental.
The following table summarizes the fair values of the assets acquired and liabilities assumed as of the respective acquisition dates ($ in millions):
| Osteogenics July 5, 2022 | Intraoral Scanner Business April 20, 2022 | ||||||||||
| Assets acquired: | |||||||||||
| Cash | $ | $ | |||||||||
| Accounts receivable | |||||||||||
| Inventories | |||||||||||
| Intangible assets | |||||||||||
| Property, plant and equipment | |||||||||||
| Prepaids and Other Current Assets | |||||||||||
| Goodwill | |||||||||||
| Non-current deferred tax asset | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Other long-term assets | |||||||||||
| Total assets acquired | |||||||||||
| Liabilities assumed: | |||||||||||
| Accounts payable | ( | ( | |||||||||
| Accrued expenses and other liabilities | ( | ( | |||||||||
| Non-current deferred tax liability | ( | ||||||||||
| Other long-term liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Total liabilities assumed | ( | ( | |||||||||
| Total net assets acquired | $ | $ | |||||||||
The intangible assets acquired consist of trade name, developed technology, and customer relationships. The weighted average amortization period of the acquired intangible assets in the aggregate is 8 and 10 years for the Intraoral Scanner Business and Osteogenics, respectively.
The excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the goodwill resulting from the acquisitions. Goodwill attributable to the acquisitions has been recorded as a non-current asset and is not amortized, but is subject to review at least on an annual basis for impairment. Goodwill recognized was primarily attributable to expected operating efficiencies and expansion opportunities in the businesses acquired. Goodwill is not deductible for income tax purposes. The pro forma impact of the acquisitions is not presented as the acquisitions were not considered material to the Company's Condensed Consolidated Financial Statements.
8
NOTE 3. DISCONTINUED OPERATIONS
On December 31, 2021, the Company sold substantially all of the KaVo Treatment Unit and Instrument Business (the “Divestiture”) to planmeca Verwaltungs Gmbh, Germany (“Planmeca”), pursuant to the master sale and purchase agreement (the “Purchase Agreement”) among the Company, Planmeca, and Planmeca Oy, as guarantor. However, the transfer of assets for Deferred Local Closing countries was not executed and closed until 2022. As of December 31, 2022, all Deferred Local Closings were completed and the Company received total net cash consideration of $386.4 million in accordance with the terms of the Purchase Agreement.
For the three months ended April 1, 2022, the Company recognized an earnout payment of $30.0 million. As all Deferred Local Closings were completed as of December 31, 2022, there are no discontinued operations reported for the three months ended March 31, 2023.
The operating results of the Divestiture for the three months ended April 1, 2022 are reflected in the Condensed Consolidated Statements of Operations within income from discontinued operations, net of tax as follows ($ in millions):
| Three Months Ended | |||||
| April 1, 2022 | |||||
| Sales | $ | ||||
| Cost of sales | |||||
| Gross profit | |||||
| Operating expenses: | |||||
| Selling, general and administrative | |||||
| Research and development | |||||
| Operating loss | ( | ||||
| Income tax expense | |||||
| Loss from discontinued operations | ( | ||||
| Gain on sale of discontinued operations, net of tax | |||||
| Net income from discontinued operations | $ | ||||
NOTE 4. CREDIT LOSSES
The allowance for credit losses is a valuation account deducted from accounts receivable to present the net amount expected to be collected. Accounts receivable are charged off against the allowance when management believes the uncollectibility of an accounts receivable balance is confirmed.
Management estimates the adequacy of the allowance by using relevant available information, from internal and external sources, relating to past events, current conditions and forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses and is adjusted as necessary using the relevant information available. The allowance for credit losses is measured on a collective basis when similar risk characteristics exist. The Company has identified one portfolio segment based on the following risk characteristics: geographic regions, product lines, default rates and customer specific factors.
The factors used by management in its credit loss analysis are inherently subject to uncertainty. If actual results are not consistent with management’s estimates and assumptions, the allowance for credit losses may be overstated or understated and a charge or credit to net income (loss) may be required.
9
The rollforward of the allowance for credit losses is summarized as follows ($ in millions):
| Balance at December 31, 2022 | $ | ||||
| Foreign currency translation | |||||
| Provision for credit losses | |||||
| Write-offs charged against the allowance | ( | ||||
| Recoveries | ( | ||||
| Balance at March 31, 2023 | $ | ||||
NOTE 5. INVENTORIES
The classes of inventory are summarized as follows ($ in millions):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials | |||||||||||
| Reserve for inventory obsolescence | ( | ( | |||||||||
| Total | $ | $ | |||||||||
NOTE 6. PROPERTY, PLANT AND EQUIPMENT
The classes of property, plant and equipment are summarized as follows ($ in millions):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Land and improvements | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Machinery, equipment and other assets | |||||||||||
| Construction in progress | |||||||||||
| Gross property, plant and equipment | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
NOTE 7. GOODWILL
The following is a rollforward of the Company’s goodwill by segment ($ in millions):
| Specialty Products & Technologies | Equipment & Consumables | Total | |||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | ||||||||||||||
| Foreign currency translation | |||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ||||||||||||||
10
NOTE 8. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities were as follows ($ in millions):
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Current | Noncurrent | Current | Noncurrent | ||||||||||||||||||||
| Compensation and benefits | $ | $ | $ | $ | |||||||||||||||||||
| Sales and product allowances | |||||||||||||||||||||||
| Contract liabilities | |||||||||||||||||||||||
| Taxes, income and other | |||||||||||||||||||||||
| Restructuring-related employee severance, benefits and other | |||||||||||||||||||||||
| Pension benefits | |||||||||||||||||||||||
| Loss contingencies | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
NOTE 9. HEDGING TRANSACTIONS AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses cross-currency swap derivative contracts to partially hedge its net investments in foreign operations against adverse movements in exchange rates between the U.S. dollar and the euro. The cross-currency swap derivative contracts are agreements to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. On January 17, 2023, the Company entered into a -year cross-currency swap derivative contract, with a notional value of $150.0 million, with respect to its $650.0 650.0
The Company also has foreign currency denominated long-term debt in the amount of €208.0 million. This senior euro term loan facility represents a partial hedge of the Company’s net investment in foreign operations against adverse movements in exchange rates between the U.S. dollar and the euro. The senior euro term loan facility is designated and qualifies as a non-derivative hedging instrument. The senior euro term loan facility matures in September 2024. Refer to Note 13 for further discussion of the senior euro term loan facility.
The change in the fair value of the cross-currency swap instrument and the foreign currency translation of the senior euro term loan facility are recorded in accumulated other comprehensive loss in equity, in the accompanying Condensed Consolidated Balance Sheets, partially offsetting the foreign currency translation adjustment of the Company’s related net investment that is also recorded in accumulated other comprehensive loss as reflected in Note 14.
The Company has also used interest rate swap derivative contracts to reduce its variability of cash flows related to interest payments with respect to its senior term and senior euro term loan facilities. The interest rate swap contracts exchanged interest payments based on variable rates for interest payments based on fixed rates. The changes in the fair value of these instruments were recorded in accumulated other comprehensive loss in equity (see Note 14). The Company did not have any outstanding interest rate swap contracts as of March 31, 2023.
Any ineffective portions of the above net investment and cash flow hedges were reclassified from accumulated other comprehensive loss into income during the period of change. Additionally, the interest income or expense from the cross-currency and interest rate swaps were recorded in interest expense, net in the Company’s Condensed Consolidated Statements of Operations consistent with the classification of interest expense attributable to the underlying debt.
11
| Notional Amount | Loss Recognized in OCI | ||||||||||
| Three Months Ended March 31, 2023 | |||||||||||
| Foreign currency denominated debt | $ | $ | ( | ||||||||
| Foreign currency contracts | |||||||||||
| Total | $ | $ | ( | ||||||||
| Notional Amount | Gain Recognized in OCI | ||||||||||
| Three Months Ended April 1, 2022 | |||||||||||
| Foreign currency denominated debt | $ | $ | |||||||||
| Foreign currency contracts | |||||||||||
| Interest rate contracts | |||||||||||
| Total | $ | $ | |||||||||
The Company did not
The Company’s derivative instruments, as well as its non-derivative debt instruments designated and qualifying as net investment hedges, were classified in the Company’s Condensed Consolidated Balance Sheets as follows ($ in millions):
| March 31, 2023 | December 31, 2022 | ||||||||||
| Derivative liabilities: | |||||||||||
| $ | $ | ||||||||||
| Nonderivative hedging instruments: | |||||||||||
| Long-term debt | $ | $ | |||||||||
Amounts related to the Company’s derivatives expected to be reclassified from accumulated other comprehensive loss to net income during the next 12 months are not significant.
NOTE 10. FAIR VALUE MEASUREMENTS
12
A summary of financial assets and liabilities that are measured at fair value on a recurring basis were as follows ($ in millions):
| Quoted Prices in Active Market (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
| March 31, 2023 | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Cross-currency swap derivative contracts | $ | $ | $ | $ | |||||||||||||||||||
| Deferred compensation plans | $ | $ | $ | $ | |||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
| December 31, 2022: | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation plans | $ | $ | $ | $ | |||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
Derivative Instruments
The cross-currency swap derivative contract was classified as Level 2 in the fair value hierarchy as it is measured using the income approach with the relevant, foreign currency current exchange rates and forward curves as inputs. Refer to Note 9 for additional information.
Deferred Compensation Plans
Certain management employees of the Company participate in nonqualified deferred compensation programs that permit such employees to defer a portion of their compensation, on a pretax basis. All amounts deferred under this plan are unfunded, unsecured obligations and are presented as a component of the Company’s compensation and benefits accrual included in accrued expenses in the accompanying Condensed Consolidated Balance Sheets (refer to Note 8). Participants may choose among alternative earnings rates for the amounts they defer, which are primarily based on investment options within the Company’s 401(k) program. Changes in the deferred compensation liability under these programs are recognized based on changes in the fair value of the participants’ accounts, which are based on the applicable earnings rates on investment options within the Company’s 401(k) program. Amounts voluntarily deferred by employees into the Company stock fund and amounts contributed to participant accounts by the Company are deemed invested in the Company’s common stock and future distributions of such contributions will be made solely in shares of Company common stock, and therefore are not reflected in the above amounts.
Contingent Consideration
Contingent consideration represents a cash hold back intended to be used for certain liabilities related to the Company’s acquisition of the Intraoral Scanner Business (as further discussed in Note 2). Contingent consideration was classified as Level 3 in the fair value hierarchy as the estimated fair value was measured using a probability weighted discounted cash flow model.
Fair Value of Financial Instruments
The carrying amounts and fair values of the Company’s financial instruments were as follows ($ in millions):
| March 31, 2023 | December 31, 2022 | ||||||||||||||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | |||||||||||||||||||
| Cross-currency swap derivative contracts | $ | $ | $ | $ | |||||||||||||||||||
| Convertible senior notes due 2025 | $ | $ | $ | $ | |||||||||||||||||||
| Long-term debt | $ | $ | $ | $ | |||||||||||||||||||
13
NOTE 11. WARRANTY
The Company generally accrues estimated warranty costs at the time of sale. In general, manufactured products are warranted against defects in material and workmanship when properly used for their intended purpose, installed correctly and appropriately maintained. Warranty periods depend on the nature of the product and range from 90 days up to the life of the product. The amount of the accrued warranty liability is determined based on historical information such as past experience, product failure rates or number of units repaired, estimated cost of material and labor and in certain instances estimated property damage. The accrued warranty liability is reviewed on a quarterly basis and may be adjusted as additional information regarding expected warranty costs becomes known.
The following is a rollforward of the Company’s accrued warranty liability ($ in millions):
| Balance at December 31, 2022 | $ | ||||
| Accruals for warranties issued during the year | |||||
| Settlements made | ( | ||||
| Effect of foreign currency translation | |||||
| Balance at March 31, 2023 | $ | ||||
NOTE 12. LITIGATION AND CONTINGENCIES
The Company records accruals for loss contingencies associated with legal matters when it is probable that a liability will be incurred, and the amount of the loss can be reasonably estimated.
The Company has determined that the liabilities associated with certain litigation matters are probable and can be reasonably estimated and has accrued $36.8 million and $35.7 million as of March 31, 2023 and December 31, 2022, respectively, which are included in accrued liabilities in the Condensed Consolidated Balance Sheets. The Company has accrued for these matters and will continue to monitor each related legal issue and adjust accruals as might be warranted based on new information and further developments in accordance with ASC 450-20-25. Amounts accrued for legal contingencies often result from a complex series of judgments about future events and uncertainties that rely heavily on estimates and assumptions including timing of related payments. The ability to make such estimates and judgments can be affected by various factors including, among other things, whether damages sought in the proceedings are unsubstantiated or indeterminate; legal discovery has not commenced or is not complete; proceedings are in early stages; matters present legal uncertainties; there are significant facts in dispute; procedural or jurisdictional issues; the uncertainty and unpredictability of the number of potential claims; or there are numerous parties involved. To the extent adverse verdicts have been rendered against the Company, the Company does not record an accrual until a loss is determined to be probable and can be reasonably estimated. In the Company's opinion, based on its examination of these matters, its experience to date and discussions with counsel, the ultimate outcome of legal proceedings, net of liabilities accrued in the Company's Condensed Consolidated Balance Sheets, is not expected to have a material adverse effect on the Company's financial position. However, the resolution of, or increase in accruals for one or more of these matters in any reporting period may have a material adverse effect on the Company’s results of operations and cash flows for that period.
14
NOTE 13. DEBT AND CREDIT FACILITIES
The components of the Company’s debt were as follows, net of debt issuance costs ($ in millions):
| March 31, 2023 | December 31, 2022 | ||||||||||
Senior term loan facility due 2024 (the “Term Loan”) | $ | $ | |||||||||
| Senior euro term loan facility due 2024 (the “Euro Term Loan”) | |||||||||||
Convertible senior notes due 2025 | |||||||||||
| Total debt | |||||||||||
| Less: current portion | ( | ( | |||||||||
| Long-term debt | $ | $ | |||||||||
Credit Facilities
The Company maintains a $650.0 million Term Loan and a €208.0 million Euro Term Loan. Additionally, the Company maintains a revolving credit facility, (together with the Term Loan and the Euro Term Loan, the “Senior Credit Facilities”), with an aggregate available borrowing capacity of $750.0 million and a $20.0 million sublimit for the issuance of standby letters of credit that can be used for working capital and other general corporate purposes. The Company may request further increases to the revolving credit facility in an aggregate amount not to exceed $350.0 million. As of March 31, 2023 and December 31, 2022, there were no
Under the Senior Credit Facilities, borrowings bear interest as follows: (1) Eurocurrency Rate Loans (as defined in the Amended Credit Agreement) bear interest at a variable rate equal to the London inter-bank offered (“LIBOR”) rate plus a margin of between 0.785 % and 1.625 %, depending on the Company’s Consolidated Leverage Ratio (as defined in the Amended Credit Agreement) as of the last day of the immediately preceding fiscal quarter; and (2) Base Rate Loans (as defined in the Amended Credit Agreement) bear interest at a variable rate equal to (a) the highest of (i) the Federal funds rate (as published by the Federal Reserve Bank of New York from time to time) plus 0.50 %, (ii) Bank of America’s “prime rate” as publicly announced from time to time and (iii) the Eurocurrency Rate (as defined in the Amended Credit Agreement) plus 1.0 %, plus (b) a margin of between 0.00 % and 0.625 %, depending on the Company’s Consolidated Leverage Ratio as of the last day of the immediately preceding fiscal quarter. In no event will Eurocurrency Rate Loans or Base Rate Loans bear interest at a rate lower than 0.0%. In the event of LIBOR cessation, the Secured Overnight Financing Rate will be used as a replacement rate. In addition, the Company is required to pay a per annum facility fee of between 0.09 % and 0.225 % depending on the Company’s Consolidated Leverage Ratio as of the last day of the immediately preceding fiscal quarter and based on the aggregate commitments under the revolving credit facility, whether drawn or not.
The interest rates for borrowings under the Term Loan were 6.41 % and 5.98 % as of March 31, 2023 and December 31, 2022, respectively. The interest rates for borrowings under the Euro Term Loan were 4.09 % and 3.28 % as of March 31, 2023 and December 31, 2022, respectively. Interest is payable quarterly for both the Term and Euro Term Loans. The Company is required to maintain a Consolidated Leverage Ratio of 3.75 to 1.00 or less and includes a provision that the maximum Consolidated Leverage Ratio will be increased to 4.25 to 1.00 for the four consecutive full fiscal quarters immediately following the consummation of any acquisition by the Company or any subsidiary of the Company in which the purchase price exceeds $100.0 million. The Company is also required to maintain a Consolidated Interest Coverage Ratio (as defined in the Amended Credit Agreement) of at least 3.00 to 1.00. The Company is subject to customary representations, warranties, conditions precedent, events of default, indemnities and affirmative and negative covenants, including covenants that, among other things, limit or restrict the Company’s and/or the Company’s subsidiaries ability, subject to certain exceptions and qualifications, to incur liens or indebtedness, merge, consolidate or sell or otherwise transfer assets, make dividends or distributions, enter into transactions with the Company’s affiliates and use proceeds of the debt financing for other than permitted uses. Additionally, upon the occurrence and during the continuance of an event of default, the lenders may declare the outstanding advances and all other obligations immediately due and payable. The Company was in compliance with all of its debt covenants as of March 31, 2023.
15
Convertible Senior Notes (the “Notes”)
On May 21, 2020, the Company issued the Notes due on June 1, 2025, unless earlier repurchased, redeemed or converted. The aggregate principal amount, which includes the initial purchasers’ exercise in full of their option to purchase an additional $67.5 million principal amount of the Notes, was $517.5 million. The net proceeds from the issuance, after deducting purchasers’ discounts and estimated offering expenses, were $502.6 million. The Company used part of the net proceeds to pay for the capped call transactions (“Capped Calls”) as further described below. The Notes accrue interest at a rate of 2.375 % per annum, payable semi-annually in arrears on June 1 and December 1 of each year. The Notes have an initial conversion rate of 47.5862 shares of the Company’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $21.01 per share of the Company’s common stock and is subject to adjustment upon the occurrence of specified events. The Notes are governed by an indenture dated as of May 21, 2020 (the “Indenture”) between the Company and Wilmington Trust, National Association, as trustee. The Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness or the issuance or repurchase of the Company’s securities by the Company.
The Notes are the Company’s senior, unsecured obligations and are (i) equal in right of payment with the Company’s existing and future senior, unsecured indebtedness; (ii) senior in right of payment to the Company’s existing and future indebtedness that is expressly subordinated to the Notes; (iii) effectively subordinated to the Company’s existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness; and (iv) structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, and (to the extent the Company is not a holder thereof) preferred equity, if any, of the Company’s subsidiaries.
Holders of the Notes may convert their Notes at any time on or after December 2, 2024 until the close of business on the second scheduled trading day preceding the maturity date. Holders of the Notes will also have the right to convert the Notes prior to December 2, 2024, but only upon the occurrence of specified events. In December 2021, the Company made the irrevocable election to settle all Notes conversions through combination settlement, satisfying the principal amount outstanding with cash and any Notes conversion value in excess of the principal amount in cash, shares of the Company’s common stock or a combination of both. If a fundamental change occurs prior to the maturity date, holders of the Notes may require the Company to repurchase all or a portion of their Notes for cash at a repurchase price equal to 100.0 % of the principal amount plus any accrued and unpaid interest. In addition, if specific corporate events occur prior to the maturity date, the Company would increase the conversion rate for a holder who elects to convert its Notes in connection with such an event in certain circumstances. As of March 31, 2023 and December 31, 2022, the stock price exceeded 130 21.01 20 30
The Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after June 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130.0 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a “Make-Whole Fundamental Change” (as defined in the Indenture) with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
The following table sets forth total interest expense recognized related to the Notes ($ in millions):
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
Contractual interest expense | $ | $ | |||||||||
Amortization of debt issuance costs | |||||||||||
Total interest expense | $ | $ | |||||||||
16
For the three months ended March 31, 2023 and April 1, 2022, the debt issuance costs were amortized using an annual effective interest rate of 3.0
As of March 31, 2023 and December 31, 2022, the if-converted value of the Notes exceeded the outstanding principal amount by $489.2 million and $311.7 million, respectively.
Debt Issuance Costs
The remaining unamortized debt issuance costs for the Convertible Senior Notes, Term Loan and Euro Term Loan were as follows ($ in millions):
| March 31, 2023 | December 31, 2022 | |||||||
| Convertible Senior Notes | $ | $ | ||||||
| Term Loan | ||||||||
| Euro Term Loan | ||||||||
| $ | $ | |||||||
The above unamortized debt issuance costs have been netted against their respective aggregate principal amounts of the related debt and are being amortized to interest expense over the term of the respective debt.
Capped Call Transactions
In connection with the offering of the Notes, the Company entered into Capped Calls with certain counterparties. The Capped Calls each have an initial strike price of approximately $21.01 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $23.79 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 2.9 million shares of the Company's common stock. The Capped Calls are generally intended to reduce or offset the potential dilution from shares of common stock issued upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. As the Capped Call transactions are considered indexed to the Company's own stock and are considered equity classified, they are recorded in equity and are not accounted for as derivatives. The cost of $20.7 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
17
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in accumulated other comprehensive loss by component are summarized below ($ in millions).
| Foreign Currency Translation Adjustments | Unrealized Pension Costs | Total Accumulated Other Comprehensive Loss | |||||||||||||||
| Three Months Ended March 31, 2023 | |||||||||||||||||
| Balance, December 31, 2022 | $ | ( | $ | $ | ( | ||||||||||||
| Other comprehensive loss before reclassifications: | |||||||||||||||||
| Increase (decrease) | |||||||||||||||||
| Income tax impact | |||||||||||||||||
| Other comprehensive income (loss) before reclassifications, net of income taxes | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss: | |||||||||||||||||
| Increase | ( | ( | |||||||||||||||
| Income tax impact | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of income taxes | ( | ( | |||||||||||||||
| Net current period other comprehensive income (loss), net of income taxes | ( | ||||||||||||||||
| Balance, March 31, 2023 | $ | ( | $ | $ | ( | ||||||||||||
| Foreign Currency Translation Adjustments | Unrealized Loss on Cash Flow Hedges | Unrealized Pension Costs | Total Accumulated Other Comprehensive Loss | ||||||||||||||||||||
| Three Months Ended April 1, 2022 | |||||||||||||||||||||||
| Balance, December 31, 2021 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive (loss) income before reclassifications: | |||||||||||||||||||||||
| (Decrease) increase | ( | ( | |||||||||||||||||||||
| Income tax impact | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive (loss) income before reclassifications, net of income taxes | ( | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss: | |||||||||||||||||||||||
| Increase | ( | ( | |||||||||||||||||||||
| Income tax impact | |||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss, net of income taxes | ( | ( | |||||||||||||||||||||
| Net current period other comprehensive (loss) income, net of income taxes | ( | ( | ( | ||||||||||||||||||||
| Balance, April 1, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
18
NOTE 15. REVENUE
The following table presents the Company’s revenues disaggregated by geographical region for the three months ended March 31, 2023 and April 1, 2022 ($ in millions). Sales taxes and other usage-based taxes collected from customers are excluded from revenues. The Company has historically defined emerging markets as developing markets of the world, which prior to the COVID-19 pandemic, experienced extended periods of accelerated growth in gross domestic product and infrastructure, including Eastern Europe, the Middle East, Africa, Latin America and Asia (with the exception of Japan and Australia). The Company defines developed markets as all markets of the world that are not emerging markets.
| Three Months Ended March 31, 2023 | |||||||||||||||||
| Specialty Products & Technologies | Equipment & Consumables | Total | |||||||||||||||
| Geographical region: | |||||||||||||||||
| North America | $ | $ | $ | ||||||||||||||
| Western Europe | |||||||||||||||||
| Other developed markets | |||||||||||||||||
| Emerging markets | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Three Months Ended April 1, 2022 | |||||||||||||||||
| Specialty Products & Technologies | Equipment & Consumables | Total | |||||||||||||||
| Geographical region: | |||||||||||||||||
| North America | $ | $ | $ | ||||||||||||||
| Western Europe | |||||||||||||||||
| Other developed markets | |||||||||||||||||
| Emerging markets | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
Sales by Major Product Group:
| Three Months Ended | |||||||||||
| ($ in millions) | March 31, 2023 | April 1, 2022 | |||||||||
| Consumables | $ | $ | |||||||||
| Equipment | |||||||||||
| Total | $ | $ | |||||||||
Consumable products include implants, regenerative products, prosthetics, orthodontic brackets, aligners and lab products from our Specialty Products & Technologies business segment and traditional consumables such as bonding agents and cements, impression materials, infection prevention products and restorative products from the Company’s Equipment & Consumables business segment. The Company’s equipment products include digital imaging systems, software and other visualization and magnification systems.
Remaining Performance Obligations
Remaining performance obligations include noncancelable purchase orders, extended warranty and service agreements and do not include revenue from contracts with customers with an original term of one year or less.
As of March 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $62.3 million and the Company expects to recognize revenue on the majority of this amount over the next 12 months.
19
Contract Liabilities
The Company often receives cash payments from customers in advance of the Company’s performance resulting in contract liabilities. These contract liabilities are classified as either current or long-term in the Condensed Consolidated Balance Sheets based on the timing of when the Company expects to recognize revenue. As of March 31, 2023 and December 31, 2022, the contract liabilities were $102.5 million and $87.5 million, respectively, and are included within accrued expenses and other liabilities and other long-term liabilities in the accompanying Condensed Consolidated Balance Sheets. Revenue recognized during the three months ended March 31, 2023 and April 1, 2022 that was included in the contract liability balance at December 31, 2022 and December 31, 2021 was $32.9 million and $24.8 million, respectively.
Significant Customers
Sales to the Company’s largest customer were 10
Seasonality
Based on historical experience, the Company generally has more sales in the second half of the calendar year than in the first half of the calendar year, with the first quarter typically having the lowest sales of the year. Based on historical customer buying patterns, the Company generally has more sales in the fourth quarter than in any other quarter of the year, driven in particular by capital spending in the Equipment & Consumables segment. As a result of this seasonality in sales, profitability in the Equipment & Consumables segment also tends to be higher in the second half of the year. There are no assurances that these historical trends will continue in the future.
NOTE 16. RESTRUCTURING ACTIVITIES AND RELATED IMPAIRMENTS
Restructuring Activities
The Company’s restructuring activities are undertaken as necessary to implement management’s strategy, streamline operations, take advantage of available capacity and resources, and ultimately achieve net cost reductions. These activities generally relate to the realignment of existing manufacturing capacity and closure of facilities and other exit or disposal activities, as it relates to executing the Company’s strategy, pursuant to significant restructuring programs.
The related liability which is included in accrued liabilities in the Condensed Consolidated Balance Sheets is summarized below ($ in millions):
| Employee Severance and Related | Facility Exit and Related | Total | |||||||||||||||
| Balance, December 31, 2022 | $ | $ | |||||||||||||||
| Costs incurred | |||||||||||||||||
| Paid/settled | ( | ( | ( | ||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ||||||||||||||
Restructuring related charges by segment were as follows ($ in millions):
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Specialty Products & Technologies | $ | $ | |||||||||
| Equipment & Consumables | ( | ||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
20
Restructuring related charges were reflected in the following captions in the accompanying Condensed Consolidated Statements of Operations ($ in millions):
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Cost of sales | $ | $ | ( | ||||||||
| Selling, general and administrative expenses | |||||||||||
| Total | $ | $ | |||||||||
NOTE 17. INCOME TAXES
The Company’s effective tax rates from continuing operations of 21.4 % and 18.0 % for the three months ended March 31, 2023, and April 1, 2022, respectively, differ from the U.S. federal statutory rate of 21.0%, primarily due to the Company’s geographical mix of earnings and net discrete tax benefits.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases, and several tax incentives to promote clean energy. Based on the Company’s current analysis of the provisions, this legislation did not have a material impact on its Condensed Consolidated Financial Statements as of or for the three months ended March 31, 2023.
NOTE 18. EARNINGS PER SHARE
Earnings per share is calculated by dividing the applicable income by the weighted average number of shares of common stock outstanding for the applicable period. Diluted earnings per share is computed based on the weighted average number of common shares outstanding plus the effect of dilutive potential shares outstanding during the period using the treasury stock method. Dilutive potential common shares include employee equity options, non-vested shares and similar instruments granted by the Company and the assumed conversion impact of the Notes. The Company will settle any Notes conversions through a combination settlement by satisfying the principal amount outstanding with cash and any Notes conversion value in excess of the principal amount in cash or shares of the Company’s common stock or any combination thereof. As such, the Company uses the treasury stock method for the assumed conversion of the Notes to compute the weighted average shares of common stock outstanding for diluted earnings per share. As the Company will settle the principal amount of the Notes in cash upon conversion, the Notes only have an impact on the Company's diluted earnings per share when the average share price of the Company’s common stock exceeds the conversion price of $21.01 per share in any applicable period. See the computation of earnings per share below for the dilutive impact of the Notes for the three months ended March 31, 2023 and April 1, 2022.
In connection with the offering of the Notes, the Company entered into Capped Calls (see further discussion in Note 13), which are intended to reduce or offset the potential dilution from shares of common stock issued upon conversion of the Notes. However, this impact is not included when calculating potentially dilutive shares since their effect is anti-dilutive. The Capped Calls will mitigate dilution from the conversion of the Notes up to the Company’s common stock price of $23.79 . If the Notes are converted at a price higher than $23.79 per share, the Capped Calls will no longer mitigate dilution from the conversion of the Notes.
21
The table below presents the computation of basic and diluted earnings per share ($ and shares in millions, except per share amounts):
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Numerator: | |||||||||||
| Income from continuing operations, net of tax | $ | $ | |||||||||
| Income from discontinued operations, net of tax | $ | $ | |||||||||
| Net income | $ | $ | |||||||||
| Denominator: | |||||||||||
| Weighted-average common shares outstanding used in basic earnings per share | |||||||||||
| Incremental common shares from: | |||||||||||
| Assumed exercise of dilutive options and vesting of dilutive restricted stock units | |||||||||||
| Assumed conversion of the Notes | |||||||||||
| Weighted average common shares outstanding used in diluted earnings per share | |||||||||||
| Earnings per share: | |||||||||||
| Earnings from continuing operations - basic | $ | $ | |||||||||
| Earnings from continuing operations - diluted | $ | $ | |||||||||
| Earnings from discontinued operations - basic | $ | $ | |||||||||
| Earnings from discontinued operations - diluted | $ | $ | |||||||||
| Earnings - basic | $ | $ | |||||||||
| Earnings - diluted | $ | $ | |||||||||
The following table presents the number of outstanding securities not included in the computation of diluted income per share, because their effect was anti-dilutive (in millions):
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Stock-based awards | |||||||||||
NOTE 19. SEGMENT INFORMATION
The Company operates and reports its results in two
The Company’s Specialty Products & Technologies products include implants, regenerative products, prosthetics, orthodontic brackets, aligners and lab products. The Company’s Equipment & Consumables products include traditional consumables such as bonding agents and cements, impression materials, infection prevention products and restorative products, while the Company’s equipment products include digital imaging systems, software and other visualization and magnification systems.
22
On December 31, 2021, the Company sold substantially all of its KaVo Treatment Unit and Instrument Business, which was part of the Company’s Equipment & Consumables segment. As a result, the financial results of the KaVo Treatment Unit and Instrument Business for the three months ended April 1, 2022, were reported as discontinued operations and all segment information and descriptions exclude the KaVo Treatment Unit and Instrument Business. As of December 31, 2022, all activities related to the sale of the KaVo Treatment Unit and Instrument Business were completed and therefore there are no discontinued operations reported for the three months ended March 31, 2023. Refer to Note 3 for more information on the Company’s discontinued operations.
Segment related information is shown below ($ in millions):
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Sales: | |||||||||||
| Specialty Products & Technologies | $ | $ | |||||||||
| Equipment & Consumables | |||||||||||
| Total | $ | $ | |||||||||
| Operating profit and reconciliation to income before taxes from continuing operations: | |||||||||||
| Specialty Products & Technologies | $ | $ | |||||||||
| Equipment & Consumables | |||||||||||
| Other | ( | ( | |||||||||
| Operating profit | |||||||||||
| Nonoperating income (expense): | |||||||||||
| Other income | |||||||||||
| Interest expense, net | ( | ( | |||||||||
| Income before taxes from continuing operations | $ | $ | |||||||||
| Identifiable assets: | March 31, 2023 | December 31, 2022 | |||||||||
| Specialty Products & Technologies | $ | $ | |||||||||
| Equipment & Consumables | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with other information, including our Condensed Consolidated Financial Statements and related notes included in Part I, Item 1, Financial Information, of this Quarterly Report on Form 10-Q, our consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 10-K”), and Part II, Item 1A, Risk Factors, of this Quarterly Report on Form 10-Q. Unless the context otherwise requires, all references herein to the “Company,” “we,” “us” or “our,” or similar terms, refer to Envista Holdings Corporation and its consolidated subsidiaries.
Certain statements included or incorporated by reference in this Quarterly Report are “forward-looking statements” within the meaning of the U.S. federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: the potential impacts of the COVID-19 pandemic on our business, financial condition, and results of operations; projections of revenue, expenses, profit, profit margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other projected financial measures; management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions and the integration thereof, divestitures, spin-offs, split-offs or other distributions, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; growth, declines and other trends in markets we sell into; future regulatory approvals and the timing thereof; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; future foreign currency exchange rates and fluctuations in those rates; the anticipated timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that Envista intends or believes will or may occur in the future. Terminology such as “believe,” “anticipate,” “should,” “could,” “intend,” “will,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including but not limited to, the following: the conditions in the U.S. and global economy, the impact of inflation and increasing interest rates, international economic, political, legal, compliance and business factors, the markets served by us and the financial markets, the impact of the COVID-19 pandemic, the impact of our debt obligations on our operations and liquidity, developments and uncertainties in trade policies and regulations, contractions or growth rates and cyclicality of markets we serve, risks relating to product manufacturing, commodity costs and surcharges, our ability to adjust purchases and manufacturing capacity to reflect market conditions, reliance on sole or limited sources of supply, disruptions relating to war, terrorism, climate change, widespread protests and civil unrest, man-made and natural disasters, public health issues and other events, security breaches or other disruptions of our information technology systems or violations of data privacy laws, fluctuations in inventory of our distributors and customers, loss of a key distributor, our relationships with and the performance of our channel partners, competition, our ability to develop and successfully market new products and services, our ability to attract, develop and retain our key personnel, the potential for improper conduct by our employees, agents or business partners, our compliance with applicable laws and regulations (including regulations relating to medical devices and the health care industry), the results of our clinical trials and perceptions thereof, penalties associated with any off-label marketing of our products, modifications to our products that require new marketing clearances or authorizations, our ability to effectively address cost reductions and other changes in the health care industry, our ability to successfully identify and consummate appropriate acquisitions and strategic investments, our ability to integrate the businesses we acquire and achieve the anticipated benefits of such acquisitions, contingent liabilities relating to acquisitions, investments and divestitures, our ability to adequately protect our intellectual property, the impact of our restructuring activities on our ability to grow, risks relating to currency exchange rates, changes in tax laws applicable to multinational companies, litigation and other contingent liabilities including intellectual property and environmental, health and safety matters, risks relating to product, service or software defects, the impact of regulation on demand for our products and services, and labor matters, and other risks and uncertainties set forth under “Item 1A. Risk Factors” in the 2022 10-K and this Quarterly Report on Form 10-Q.
Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Forward-looking statements contained herein speak only as of the date of this Quarterly Report. Except to the extent required by applicable law, we do not assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
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BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements present our historical financial position, results of operations, changes in stockholders’ equity and cash flows in accordance with GAAP.
Sale of the KaVo Treatment Unit and Instrument Business
On December 31, 2021, we sold substantially all of the KaVo Treatment Unit and Instrument Business (the “Divestiture”) to planmeca Verwaltungs Gmbh, Germany (“Planmeca”), pursuant to the master sale and purchase agreement (the “Purchase Agreement”) among us, Planmeca, and Planmeca Oy, as guarantor. However, the transfer of assets in certain countries was not executed and closed until 2022 (“Deferred Local Closing”). As of December 31, 2022, all Deferred Local Closings were completed and we received total net cash consideration of $386.4 million in accordance with the terms of the Purchase Agreement.
The Divestiture was part of our strategy to structurally improve our long-term margins and represented a strategic shift with a major effect on our operations and financial results as described in ASC 205-20. The sale met the criteria to be accounted for as a discontinued operation and therefore, we applied discontinued operations treatment for the Divestiture as required by ASC 205-20. In accordance with ASC 205-20, we have reported the financial results of the Divestiture as discontinued operations in our Condensed Consolidated Statements of Operations and have excluded the KaVo Treatment Unit and Instrument Business from all segment information and descriptions for the three months ended April 1, 2022. Our Condensed Consolidated Statements of Cash Flows include the financial results of the KaVo Treatment Unit and Instrument Business for the three months ended April 1, 2022. As all Deferred Local Closings were completed as of December 31, 2022, there are no discontinued operations reported for the three months ended March 31, 2023.
OVERVIEW
General
We provide products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile. We help our customers deliver the best possible patient care through industry-leading solutions, technologies, and services. With leading brand names, innovative technology and significant market positions, we are a leading worldwide provider of a broad range of solutions to support implant-based tooth replacements, orthodontic treatments, digital imaging and diagnostics, as well as general dental consumables, equipment and services, and are dedicated to driving technological innovations that help dental professionals improve clinical outcomes and enhance productivity. Our research and development, manufacturing, sales, distribution, service and administrative facilities are located in more than 30 countries across North America, Asia, Europe, the Middle East and Latin America.
We operate in two business segments: Specialty Products & Technologies and Equipment & Consumables. Our Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, including regenerative solutions, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products. Our Equipment & Consumables segment develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; endodontic systems and related consumables; and restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
For the three months ended March 31, 2023, sales derived from customers outside of the United States were 52.4%, compared to the three months ended April 1 2022, of 51.2%. As a global provider of dental consumables, equipment and services, our operations are affected by worldwide, regional and industry-specific economic and political factors. Given the broad range of dental products, software and services provided and geographies served, we do not use any indices other than general economic trends to predict our overall outlook. Our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future.
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As a result of our geographic and product line diversity, we face a variety of opportunities and challenges, including rapid technological development in most of our served markets, the expansion and evolution of opportunities in emerging markets, trends and costs associated with a global labor force, consolidation of our competitors and increasing regulation. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend in particular on our ability to expand our business in emerging geographies and market segments, identify, consummate and integrate appropriate acquisitions, develop innovative and differentiated new products and services, expand and improve the effectiveness of our sales force, continue to reduce costs and improve operating efficiency and quality and effectively address the demands of an increasingly regulated global environment. We are making significant investments to address the rapid pace of technological change in our served markets and to globalize our manufacturing, research and development and customer-facing resources (particularly in emerging markets and our dental implant business) in order to be responsive to our customers throughout the world and improve the efficiency of our operations.
Key Trends and Conditions Affecting Our Results of Operations
There have been no material changes to the key trends and conditions affecting our results of operations that were disclosed in our 2022 10-K, except as follows:
Foreign Currency Exchange Rates
On a period-over-period basis, currency exchange rates negatively impacted reported sales by 1.6% for the three months ended March 31, 2023, compared to the comparable period of 2022, primarily due to the strength of the U.S. dollar against most major currencies. Any future strengthening of the U.S. dollar against major currencies would negatively impact our sales and results of operations for the remainder of the year, and any weakening of the U.S. dollar against major currencies would positively impact our sales and results of operations for the remainder of the year.
General Economic Conditions
In addition to industry-specific factors, we, like other businesses, face challenges related to global economic conditions, including rising inflation, increasing interest rates, fluctuating foreign currency exchange rates, slowing economic growth, and continuing supply chain disruptions. Dental costs are largely out-of-pocket for the consumer and thus utilization rates can vary significantly depending on economic growth. While many of our products are considered necessary by patients regardless of the economic environment, certain products and services that support discretionary dental procedures may be more susceptible to changes in economic conditions.
Pricing Controls
Certain countries, as well as some private payors, control the price of health care products, directly or indirectly, through reimbursement, payment, pricing or coverage limitations, tying reimbursement to outcomes or (in the case of governmental entities) compulsory licensing. For example, China has implemented volume-based procurement policies, a series of centralized reforms instituted in China on both a national and regional basis that has resulted in significant price cuts for medical and dental consumables.
Russia-Ukraine Conflict
Russia’s invasion of Ukraine and the global response to this invasion, including sanctions imposed by the U.S. and other countries, could have an adverse impact on our business, including our ability to market and sell products in the affected regions, potentially heightening our risk of cyber security attacks, impacting our ability to enforce our intellectual property rights in Russia, creating disruptions in the global supply chain, and potentially having an adverse impact on the global economy, financial markets, energy markets, currency rates and otherwise. While we are experiencing some volatility in sales from this region, Russia’s invasion of Ukraine did not have a material impact on our financial position or results of operations as of and for the three months ended March 31, 2023 and April 1, 2022.
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COVID-19
The extent of the impact of the COVID-19 pandemic on our business remains uncertain and difficult to predict because of the dynamic and evolving nature of the situation. The global impact of the outbreak continues to adversely affect many industries, and different geographies continue to reflect the effects of public health restrictions in various ways. The economic recovery following the impact of the COVID-19 pandemic is only partially underway and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with uncertainty regarding its ultimate length and trajectory. During the three months ended March 31, 2023, notwithstanding improvement in many markets in which we operate due to a return to more normalized business operations, certain markets continued to be adversely impacted by COVID-19.
For additional information on the risks of COVID-19 to our business, please refer to the “Item 1A. Risk Factors—Risks Related to our Business” section of our 2022 10-K.
Acquisitions
Our growth strategy contemplates future acquisitions and we continually evaluate potential acquisitions that either strategically fit with our existing portfolio or expand our portfolio into new and attractive business areas. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated and anticipated synergies or cost savings are achieved. During the fiscal year 2022, we completed two acquisitions.
On July 5, 2022, we acquired all of the equity of Osteogenics for total consideration of approximately $128.2 million, subject to certain customary adjustments as provided in the Equity Purchase Agreement dated May 17, 2022. Osteogenics develops innovative regenerative solutions for periodontists, oral and maxillofacial surgeons, and clinicians involved in implant dentistry throughout the world, and is part of our Specialty Products & Technologies segment.
On April 20, 2022, we completed our acquisition of Carestream Dental’s Intraoral Scanner Business for total consideration of approximately $580.3 million, including contingent consideration of $7.5 million, and subject to certain customary adjustments as provided in the IOS Purchase Agreement. The Intraoral Scanner Business manufactures, markets, sells, commercializes, distributes, services, trains, supports, and maintains operations of intraoral scanners and software, and is part of our Equipment & Consumables segment. We purchased the Intraoral Scanner Business through the acquisition of certain assets and the assumption of certain liabilities as well as the acquisition of all of the equity of certain subsidiaries of Carestream Dental.
Envista Business Systems
Throughout this discussion, references to sales volume refer to the impact of both price and unit sales and references to productivity improvements generally refer to improved cost-efficiencies resulting from the ongoing application of Envista Business Systems (“EBS”). We believe our deep-rooted commitment to EBS helps drive our market leadership and differentiates us in the dental products industry. EBS encompasses not only lean tools and processes, but also methods for driving growth, innovation and leadership. Within the EBS framework, we pursue a number of ongoing strategic initiatives relating to streamlining business operations, portfolio simplification, reduction of costs, redeployment of resources, customer insight generation, product development and commercialization, efficient sourcing, and improvement in manufacturing and back-office support, all with a focus on continually improving quality, delivery, cost, growth and innovation.
Non-GAAP Measures
In order to establish period-to-period comparability, we include the non-GAAP measure of core sales in this report. References to the non-GAAP measure of core sales (also referred to as core revenues or sales/revenues from existing businesses) refer to sales calculated according to GAAP, but excluding:
•sales from acquired businesses for one year from the acquisition date;
•sales from discontinued products; and
•the impact of currency translation.
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We exclude sales from acquired businesses in order to provide accurate year over year comparisons. Sales from discontinued products includes major brands or major products that we have made the decision to discontinue as part of a portfolio restructuring. Discontinued brands or products consist of those which we (1) are no longer manufacturing, (2) are no longer investing in the research or development of, and (3) expect to discontinue all significant sales of within one year from the decision date to discontinue. The portion of sales attributable to discontinued brands or products is calculated as the net decline of the applicable discontinued brand or product from period-to-period. We exclude sales from discontinued products because discontinued products do not have a continuing contribution to operations and management believes that excluding such items provides investors with a means of evaluating our on-going operations and facilitates comparisons to our peers.
The portion of sales attributable to currency translation is calculated as the difference between:
•the period-to-period change in sales; and
•the period-to-period change in sales after applying current period foreign exchange rates to the prior year period.
Core sales growth should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies. We believe that reporting the non-GAAP financial measure of core sales growth provides useful information to investors by helping identify underlying growth trends in our on-going business and facilitating comparisons of our sales performance with our performance in prior and future periods and to our peers. We also use core sales growth to measure our operating and financial performance. We exclude the effect of currency translation from core sales because currency translation is not under our control, is subject to volatility and can obscure underlying business trends.
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RESULTS OF OPERATIONS
All comparisons, variances, increases or decreases discussed below are for the three months ended March 31, 2023, compared to the three months ended April 1, 2022.
| Three Months Ended | ||||||||||||||||||||
| ($ in millions) | March 31, 2023 | April 1, 2022 | % Change | |||||||||||||||||
| Sales | $ | 627.2 | 100.0% | $ | 631.4 | 100.0% | (0.7) | % | ||||||||||||
| Cost of sales | 264.5 | 42.2% | 257.3 | 40.8% | 2.8 | % | ||||||||||||||
| Gross profit | 362.7 | 57.8% | 374.1 | 59.2% | (3.0) | % | ||||||||||||||
| Operating costs: | ||||||||||||||||||||
| Selling, general and administrative (“SG&A”) expenses | 266.1 | 42.4% | 258.2 | 40.9% | 3.1 | % | ||||||||||||||
| Research and development (“R&D”) expenses | 24.5 | 3.9% | 24.4 | 3.9% | 0.4 | % | ||||||||||||||
| Operating profit | 72.1 | 11.5% | 91.5 | 14.5% | (21.2) | % | ||||||||||||||
| Nonoperating income (expense): | ||||||||||||||||||||
| Other income | 0.3 | —% | 0.3 | —% | — | % | ||||||||||||||
| Interest expense, net | (16.7) | (2.7)% | (5.9) | (0.9)% | 183.1 | % | ||||||||||||||
| Income before income taxes | 55.7 | 8.9% | 85.9 | 13.6% | (35.2) | % | ||||||||||||||
| Income tax expense | 11.9 | 1.9% | 15.5 | 2.5% | (23.2) | % | ||||||||||||||
| Income from continuing operations | 43.8 | 7.0% | 70.4 | 11.1% | (37.8) | % | ||||||||||||||
| Income from discontinued operations, net of tax | — | —% | 4.5 | 0.7% | (100.0) | % | ||||||||||||||
| Net income | $ | 43.8 | 7.0% | $ | 74.9 | 11.9% | (41.5) | % | ||||||||||||
| Effective tax rate from continuing operations | 21.4 | % | 18.0 | % | ||||||||||||||||
GAAP Reconciliation
Sales and Core Sales Growth
| % Change Three Month Period Ended March 31, 2023 vs. Comparable 2022 Period | |||||
| Total sales growth (GAAP) | (0.7) | % | |||
| Plus the impact of: | |||||
| Acquisition | (3.3) | % | |||
| Currency exchange rates | 1.6 | % | |||
| Core sales growth (non-GAAP) | (2.4) | % | |||
Sales and core sales growth for the three months ended March 31, 2023 decreased 0.7% and 2.4%, respectively, compared to the comparable period in 2022. A decrease in sales volume negatively impacted sales growth by 2.8% on a period-over-period basis, slightly offset by an increase in price of 0.4%. Sales in developed markets decreased primarily due to a decrease in North America partially offset by growth in Western and Eastern Europe. Sales in emerging markets decreased primarily driven by China sales.
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COST OF SALES AND GROSS PROFIT MARGIN
| Three Months Ended | |||||||||||
| ($ in millions) | March 31, 2023 | April 1, 2022 | |||||||||
| Cost of sales | 264.5 | 257.3 | |||||||||
| Gross profit margin | 57.8 | % | 59.2 | % | |||||||
The increase in cost of sales during the three months ended March 31, 2023 as compared to the comparable period in 2022, was primarily due to unfavorable product mix and the impact of higher costs due to inflation.
The decrease in gross profit margin percentage during the three months ended March 31, 2023, as compared to the comparable period in 2022, was primarily due to a decrease in sales volume, unfavorable product mix, and higher costs due to inflation, partially offset by period-over-period savings associated with productivity improvements.
OPERATING EXPENSES
| Three Months Ended | |||||||||||
| ($ in millions) | March 31, 2023 | April, 2022 | |||||||||
| Selling, general and administrative expenses | $ | 266.1 | $ | 258.2 | |||||||
| Research and development expenses | $ | 24.5 | $ | 24.4 | |||||||
| SG&A as a % of sales | 42.4 | % | 40.9 | % | |||||||
| R&D as a % of sales | 3.9 | % | 3.9 | % | |||||||
The increase in SG&A expenses as a percentage of sales for the three months ended March 31, 2023 as compared to the comparable period of 2022, was primarily due to higher compensation spend and increased amortization of intangible assets.
R&D expenses as a percentage of sales for the three months ended March 31, 2023, were consistent with the comparable period in 2022.
INTEREST COSTS AND FINANCING
Interest costs increased from $5.9 million during the three months ended April 1, 2022 to $16.7 million for the three months ended March 31, 2023 due primarily to higher interest rates on our variable rate Term Loan and Euro Term Loan borrowings.
INCOME TAXES
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Effective tax rate from continuing operations | 21.4 | % | 18.0 | % | |||||||
Our effective tax rate from continuing operations of 21.4% for the three months ended March 31, 2023, was higher compared to the comparable period in 2022 primarily due to the Company’s geographical mix of earnings and a decrease in certain discrete tax benefits.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases, and several tax incentives to promote clean energy. Based on our current analysis of the provisions, this legislation did not have a material impact on our Condensed Consolidated Financial Statements as of or for the three months ended March 31, 2023.
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RESULTS OF OPERATIONS - BUSINESS SEGMENTS
Specialty Products & Technologies
Our Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, including regenerative solutions, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products.
Specialty Products & Technologies Selected Financial Data
| Three Months Ended | |||||||||||
| ($ in millions) | March 31, 2023 | April 1, 2022 | |||||||||
| Sales | $ | 410.0 | $ | 397.1 | |||||||
| Operating profit | $ | 71.1 | $ | 70.3 | |||||||
| Operating profit as a % of sales | 17.3 | % | 17.7 | % | |||||||
Sales and Core Sales Growth
| % Change Three Month Period Ended March 31, 2023 vs. Comparable 2022 Period | |||||
| Total sales growth (GAAP) | 3.2 | % | |||
| Plus the impact of: | |||||
| Acquisitions | (2.2) | % | |||
| Currency exchange rates | 2.0 | % | |||
| Core sales growth (non-GAAP) | 3.0 | % | |||
Sales
Sales and core sales growth for the three months ended March 31, 2023 increased 3.2% and 3.0%, respectively, compared to the comparable period in 2022. Sales growth increased by 3.6% due to higher volume, partially offset by a decrease in sales price which impacted sales growth by 0.6% on a period-over-period basis. Additionally, sales for the three months ended March 31, 2023 were also positively impacted by the acquisition of Osteogenics.
Sales in developed markets, for the three months ended March 31, 2023, increased primarily due to an increase in Western and Eastern Europe, partially offset by a slight decrease in North America.
Operating Profit
Operating profit margin was 17.3% for the three months ended March 31, 2023, as compared to an operating profit margin of 17.7% for the comparable period of 2022. The decrease in operating profit margin for the three month period was primarily due to unfavorable product mix, investments in our long-term growth initiatives, and the impact of inflation, partially offset by an increase in sales volume and by period-over-period savings associated with productivity improvements.
EQUIPMENT & CONSUMABLES
Our Equipment & Consumables segment develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; endodontic systems and related consumables; restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
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Equipment & Consumables Selected Financial Data
| Three Months Ended | |||||||||||
| ($ in millions) | March 31, 2023 | April 1, 2022 | |||||||||
| Sales | $ | 217.2 | $ | 234.3 | |||||||
| Operating profit | $ | 32.5 | 45.5 | ||||||||
| Operating profit as a % of sales | 15.0 | % | 19.4 | % | |||||||
Sales and Core Sales Growth
| % Change Three Month Period Ended March 31, 2023 vs. Comparable 2022 Period | |||||
| Total sales growth (GAAP) | (7.3) | % | |||
| Plus the impact of: | |||||
| Acquisition | (5.2) | % | |||
| Currency exchange rates | 0.8 | % | |||
| Core sales growth (non-GAAP) | (11.7) | % | |||
Sales
Sales and core sales growth for the three months ended March 31, 2023 decreased 7.3% and 11.7%, respectively, compared to the comparable period in 2022. A decrease in sales volume negatively impacted sales growth by 13.9%, partially offset by the positive impact of a 2.2% price increase on a period-over-period basis. Sales for the three months ended March 31, 2023, were positively impacted by the acquisition of our Intraoral Scanner Business.
Sales in developed markets, for the three months ended March 31, 2023, decreased primarily due to a decrease in North America, Western Europe, and emerging markets.
Operating Profit
Operating profit margin was 15.0% for the three months ended March 31, 2023, as compared to an operating profit margin of 19.4% for the comparable period of 2022. The decrease in operating profit margin was primarily due to lower sales volume, increased amortization of intangible assets, and the impact of incremental material price cost due in part to inflation, partially offset by higher sales price.
LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We continue to generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity are sufficient to allow us to manage our capital structure on a short-term and long-term basis and continue investing in existing businesses and consummating strategic acquisitions.
Following is an overview of our cash flows and liquidity, which includes the cash flows of the KaVo Treatment Unit and Instrument Business for the three months ended April 1, 2022.
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Overview of Cash Flows and Liquidity
| Three Months Ended | |||||||||||
| March 31, 2023 | April 1, 2022 | ||||||||||
| Net cash provided by operating activities | $ | 3.1 | $ | 3.5 | |||||||
| Payments for additions to property, plant and equipment | $ | (17.5) | $ | (19.8) | |||||||
| Proceeds from sale of KaVo treatment unit and instrument business | — | 30.0 | |||||||||
| All other investing activities, net | (4.5) | (5.1) | |||||||||
| Net cash (used in) provided by investing activities | $ | (22.0) | $ | 5.1 | |||||||
| Proceeds from borrowings | $ | — | $ | 0.3 | |||||||
| Repayment of borrowings | — | (0.5) | |||||||||
| Proceeds from stock option exercises | 4.6 | 13.1 | |||||||||
| Tax withholding payment related to net settlement of equity awards | (6.1) | (7.6) | |||||||||
| Net cash (used in) provided by financing activities | $ | (1.5) | $ | 5.3 | |||||||
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period due to working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impacting reported cash flows.
Net cash provided by operating activities was $3.1 million during the three months ended March 31, 2023, as compared to net cash provided by operating activities of $3.5 million for the comparable period of 2022, primarily due to lower net income, offset by lower overall net cash payments during the three months ended March 31, 2023.
Investing Activities
Cash flows relating to investing activities consist primarily of cash used for capital expenditures and acquisitions. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information technology systems.
Net cash used in investing activities was $22.0 million for the three months ended March 31, 2023, as compared to net cash provided by investing activities of $5.1 million for the comparable period in 2022, primarily due to the prior year period containing the earnout from the sale of the KaVo Treatment Unit and Instruments Business for the three months ended March 31, 2023.
Financing Activities and Indebtedness
Cash flows relating to financing activities consist primarily of cash flows associated with debt borrowings and the issuance of common stock.
Net cash used in financing activities was $1.5 million during the three months ended March 31, 2023 as compared to net cash provided by financing activities of $5.3 million for the comparable period of 2022 primarily due to a reduction in cash flows associated with the issuance of common stock.
For a description of our outstanding debt as of March 31, 2023, refer to Note 13 to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
We intend to satisfy any short-term liquidity needs that are not met through operating cash flow and available cash primarily through our revolving credit facility.
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Cash and Cash Requirements
As of March 31, 2023, we held $585.2 million of cash and cash equivalents that were held on deposit with financial institutions. Of this amount, $91.3 million was held within the United States and $493.9 million was held outside of the United States. We will continue to have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our restructuring activities as required and support other business needs. We generally intend to use available cash, internally generated funds and our revolving credit facility to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions, we may need to enter into new credit facilities or access the capital markets. We may also access the capital markets from time to time to take advantage of favorable interest rate environments or other market conditions. However, there is no guarantee that we will be able to obtain alternative sources of financing on commercially reasonable terms or at all. See “Item 1A. Risk Factors—Risks Related to Our Business” in our 2022 10-K.
Generally, cash and cash equivalents held in these financial institutions may be withdrawn or redeemed at face value, and therefore minimal credit risk exists with respect to them. Nonetheless, deposits with these financial institutions exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits or similar limits in foreign jurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash and cash equivalent balances in the operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our funds fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our cash and cash equivalents will not be affected if the financial institutions where we hold our cash and cash equivalents fail.
While repatriation of some cash held outside the United States may be restricted by local laws, most of our foreign cash could be repatriated to the United States. Following enactment of the Tax Cut and Jobs Act of 2017 (“TCJA”) and the associated transition tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax; however, repatriation of cash could subject us to non-U.S. jurisdictional taxes on distributions. The cash that our non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes, if any, applicable to such earnings including basis differences in our foreign subsidiaries are not readily determinable.
As of March 31, 2023, we believe that we have sufficient sources of liquidity to satisfy our cash needs over the next 12 months and beyond, including our cash needs in the United States.
There were no material changes to our contractual obligations during the three months ended March 31, 2023.
Off-Balance Sheet Arrangements
There were no material changes to the Company’s off-balance sheet arrangements described in the 2022 10-K that would have a material impact on the Company’s Condensed Consolidated Financial Statements.
Debt Financing Transactions
For a description of our outstanding debt as of March 31, 2023, refer to Note 13 to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING ESTIMATES
There were no material changes to our critical accounting estimates described in the 2022 10-K that have had a material impact on our Condensed Consolidated Financial Statements.
The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. If actual results are not consistent with management’s estimates and assumptions used for valuation allowances, contingencies, potential impairments, revenue recognition and income taxes, the related account balances may be overstated or understated and a charge or credit to net income may be required.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosures about market risk appear in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Qualitative and Quantitative Disclosures About Market Risk,” in our 2022 10-K. There were no material changes to this information reported in our 2022 10-K during the quarter ended March 31, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our President and Chief Executive Officer, and Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer, and Senior Vice President and Chief Financial Officer, have concluded that, as of the end of such period, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. Other Information
Item 1. Legal Proceedings
There have been no material changes to legal proceedings from our 2022 10-K. For additional information regarding legal proceedings, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Legal Proceedings” in our 2022 10-K.
Item 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Part I, “Item 1A. Risk Factors,” of our 2022 Form 10-
K. You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 2022 10-K, which could materially affect our business, financial position, or future results of operations. The risks described in our 2022 10-K, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
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Item 6. Exhibits
EXHIBIT INDEX
| Exhibit Number | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 10.1* | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
*Indicates management contract or compensatory plan, contract or arrangement. | |||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ENVISTA HOLDINGS CORPORATION | ||||||||
Date: May 3, 2023 | By: | /s/ Howard H. Yu | ||||||
| Howard H. Yu | ||||||||
| Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||||||
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