During the three months ended July 3, 2020, the Company made the decision to exit a portion of its treatment unit business, which is part of the Equipment & Consumables segment, as part of its strategy to restructure its portfolio and improve its cost structure. In connection with the planned exit which is expected to be substantially complete by the end of the third quarter, the Company recognized a non-cash loss of $19 million. The majority of this loss included $9 million related to the impairment of certain intangible assets, which is included in selling, general and administrative expenses and $9 million of inventory write-offs, which is included in cost of sales. As soon as the production activities are completed, the Company expects to sell the manufacturing facility related to this business.
The restructuring related charges incurred during the three and six months ended July 2, 2021 and July 3, 2020, and June 28, 2019, are reflected in the following captions in the accompanying Condensed Consolidated and Combined Statements of Operations ($ in millions):
In connection with the offering of the Notes, the Company entered into Capped Calls (see further discussion in Note 13)12), 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. Until the average market price of the Company's common stock exceeds the cap price of $23.79 per share, exercise of theThe Capped Calls will mitigate dilution from the Notes.
The Company operates and reports its results in 2 separate business segments, the Specialty Products & Technologies and Equipment & Consumables segments. When determining the reportable segments, the Company aggregated operating segments based on their similar economic and operating characteristics. Operating profit represents total revenues less operating expenses, excluding nonoperating income (expense) and income taxes. Operating profit amounts in the Other segment consist of unallocated corporate costs and other costs not considered part of management’s evaluation of reportable segment operating performance. The identifiable assets by segment are those used in each segment’s operations. Inter-segment amounts are not significant and are eliminated to arrive at consolidated totals.
The Company’s Specialty Products & Technologies products include implants, 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 treatment units, instruments, digital imaging systems, software and other visualization and magnification systems.
Certain of the Company’s revenue arrangements relate to contracts entered into in the ordinary course of business with Danaher and Danaher affiliates. The amount of related-party revenue was not significant for the three and six months ended June 28, 2019.
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 and Combined Financial Statements and related notes included in Part I, Item 1, Financial Information, of this Quarterly Report on Form 10-Q, our consolidated and combined financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 20192020 (the “2019“2020 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 impact of the COVID-19 pandemic, including new variants of the virus, the pace of recovery in the markets in which we operate, the conditions in the U.S. and global economy, the markets served by us and the financial markets, the impact of our debt obligations on our operations and liquidity, developments and uncertainties in U.S. policy stemming from the U.S. administration, such as changes in U.S. trade and tariff policies and the reaction of other countries thereto,regulations, contractions or growth rates and cyclicality of markets we serve, 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, 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, significant restrictions and/or potential liability based on tax implications of transactions with Danaher, security breaches or other disruptions of our information technology systems or violations of data privacy laws, our ability to adequately protect our intellectual property, the impact of our restructuring activities on our ability to grow, risks relating to potential impairment of goodwill and other intangible assets, currency exchange rates, tax audits and changes in our tax rate and income tax liabilities, changes in tax laws applicable to multinational companies, litigation and other contingent liabilities including intellectual property and environmental, health and safety matters, our ability to implement and maintain effective internal control over financial reporting, risks relating to product, service or software defects, 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, the impact of regulation on demand for our products and services, labor matters, international economic, political, legal, compliance and business factors (including the impact of the United Kingdom’s decision to leave the EU),and disruptions relating to war, terrorism, widespread protests and civil unrest, man-made and natural disasters, public health issues and other events, pension plan costs, our ability to attract, develop and retain talented executives and other key employees, and other risks and uncertainties set forth under “Item 1A. Risk Factors” in the 20192020 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.
BASIS OF PRESENTATION
The accompanying Condensed Consolidated and Combined Financial Statements present our historical financial position, results of operations, changes in stockholders’ equity and cash flows in accordance with accounting principles generally accepted in the United States (“GAAP”). The Condensed Consolidated and Combined Financial Statements for periods prior to the Separation were derived from Danaher’s consolidated financial statements and accounting records and prepared in accordance with GAAP for the preparation of carved-out combined financial statements. Through the date of the Separation, all revenues and costs as well as assets and liabilities directly associated with our business have been included in the Condensed Consolidated and Combined Financial Statements. Prior to the Separation, our Condensed Consolidated and Combined Financial Statements also included allocations of certain general, administrative, sales and marketing expenses and cost of sales from Danaher’s corporate office and from other Danaher businesses to us and allocations of related assets, liabilities, and Danaher’s investment, as applicable. The allocations were determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the financial statements had we been an entity that operated independently of Danaher during the applicable periods. Related party allocations prior to the Separation, including the method for such allocation, are discussed further in Note 21 to our Condensed Consolidated and Combined Financial Statements. Following the Separation, our Condensed Consolidated Financial Statements include our accounts and our wholly owned subsidiaries and no longer include any allocations of expenses from Danaher to us.GAAP.
Our Condensed Consolidated and Combined Financial Statements may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what our financial position, results of operations and cash flows may be in the future.
We have incurred and will continue to incur additional costs as a separate public company. As a separate public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Danaher. These additional costs are primarily for the following:
additional personnel costs, including salaries, benefits and potential bonuses and/or stock-based compensation awards for staff additions to replace support provided by Danaher that is not covered by the Transition Services Agreement; and
corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees.
Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs.
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. With leading brand names, innovative technology and significant market positions, we are a leading worldwide provider of a broad range of dental implants, orthodontic appliances, 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.
DuringFor both the three and six months ended July 3, 2020 and year ended December 31, 2019,2, 2021, sales derived from customers outside of the United States were 57.2%55.4%, 55.8%compared to the three and 56.0%six months ended July 3, 2020 of 57.2% and 55.8%, respectively. 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.
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 emerging 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.
We operate in two business segments: Specialty Products & Technologies and Equipment & Consumables. Our Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, 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; handpieces and associated consumables; treatment units and other dental practice equipment; endodontic systems and related consumables; and restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
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 2019 10-K, other than2020 10-K.
COVID-19
The extent of the impact of COVID-19.
The continuing global spread of COVID-19 has led to unprecedented restrictions on, and disruptions in, business and personal activities, including as a result of preventive and precautionary measures that we, our dental customers, other businesses, our communities and governments are taking to mitigate the spread of the virus. The impact of COVID-19 and measures to prevent its spread are affecting our businesses in several ways as follows:
Employees and Customers
We value the safety of our employees and customers and have leveraged our technological resources to institute work-from-home arrangements for most of our employees and to continue interacting with our customers on a remote basis where possible. We have implemented social distancing guidelines, staggered shifts and more frequent disinfection processes for employees that need to be in manufacturing locations, offices or interact with customers to help ensure their safety. We have expanded the availability of our virtual training and education for our customers. Our employees have donated thousands of masks and other personal protective equipment to their local communities worldwide. In China, we were one of the first to donate infection prevention products to the Wuhan government and our Orascoptic business has donated eye protection to hundreds of healthcare professionals in the United States. Metrex, our infection control and prevention business, has been providing products to help our customers maintain proper disinfection protocols.
Prioritization of Business Activities
In response to the COVID-19 pandemic on our business is highly uncertain and difficult to predict because of the dynamic and evolving nature of the crisis. During 2020, our sales and results of operations were most impacted by the COVID-19 pandemic during the first and second quarters with positive signs of recovery during the third and fourth quarters of 2020. During the three and six months ended July 2, 2021, we have increased our investmentcontinued to see positive signs of recovery in our infection control and prevention business by increasing shipments of medical grade disinfectant products and have further increased our investment to expand capacity.
We continue transforming our portfolio by investingcertain markets in our implant and clear aligner products and also making investments in emerging markets. The cost reduction initiativeswhich we have taken and willoperate, however, certain markets continue to undertake in the future, allow us to further invest in this growth strategy, which in turn we believe should improve our margins.
We obtained regulatory approval of our N1 implant system
and made our first sales in June. We will continue to roll out N1 to select customers in the second half
A worsening of the year. Our Nobel Biocare business has obtained the EU Medical Device Regulation (“MDR”) Quality Management System certification and is onepandemic or impacts of new variants of the first in the dental industryvirus may lead to do so. This is an important milestone for Nobel Biocare, and we believe that we are on track in our efforts to achieve MDR certification for our full portfolio of products.
Results of Operations
In response to COVID-19, many dental associations globally recommended that dental practices delay elective procedures and only perform emergency procedures. As a result, there were widespread temporary closures of dental practices in the future. Furthermore, capital markets and economies worldwide have also been negatively impacted by the COVID-19 pandemic, and it is possible that it could cause a material local and/or global economic slowdown or global recession. Such economic disruption could have a material adverse effect on our business as our customers curtail and reduce capital and overall spending. Policymakers around the world dueglobe have responded with fiscal policy actions to support the pandemic, except to perform emergency procedures. During the three months ended July 3, 2020, dental practices started to reopen, however, the average practice’s patient volumehealthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remains below pre-COVID-19 levels. As dental practices reopen, dental associations have recommended enhanced safety, disinfection and social distancing protocols. These measures may remain in place for a significant period of time in certain regions and are likely to continue to adversely affect our business, results of operations and financial condition. As a result, our sales have been significantly negatively impacted, which has led to a temporary reduction in our manufacturing capacity as we have idled certain manufacturing facilities and furloughed the employees that work at the idled facilities in response. In addition, we have implemented various temporary cost reduction initiatives, which have included employee furloughs throughout the Company, implementing pay reductions, reducing discretionary spending, delaying capital expenditures and eliminating all non-essential business travel. We have also accelerated and increased our planned structural spending reduction programs that we believe will be substantially completed by the end of 2020.uncertain.
We expect the ultimate significanceThe severity of the impact of these disruptions,the COVID-19 pandemic on our business will depend on a number of factors, including, but not limited to, the scope and duration of the pandemic, the extent and severity of their adversethe impact on our financialcustomers, the measures that have been and operational results,may be taken to be dependent oncontain the length of time that such disruptionsvirus (including its various mutations) and mitigate its impact, U.S. and foreign government actions to respond to the reduction in global economic activity, our ability to continue which will, in turn, depend on the currently unknowable duration of the COVID-19 pandemicto manufacture and source our products, the impact of governmental regulations that are imposed in response to the pandemic. Moreover, efforts to slow or prevent a recurrence of the spread of the virus are likely to continue to curtail the operations of our customerspandemic and their patients for an indeterminate period of time, impacting our operations as purchasing decisions are delayed or lost, increasing logistical complexities as a result of closed customer offices, sales and marketing efforts are postponed, and manufacturing operations are curtailed to adjust to declining sales.
Our businesses could also be impacted should the disruptions from COVID-19 lead to changes in consumer behavior and spending, and our business may be particularly susceptible to these changes as a material portion of our products may be viewed as discretionary purchases and therefore more susceptible to any global or regional recession that may result from efforts to prevent or delay the spread of the virus. Additionally, the COVID-19 impact on the capital markets could affect our cost of borrowing and our ability to raise additional capital. There are certain limitationsassociated economic downturn on our ability to mitigateaccess capital if and when needed and how quickly and to what extent normal economic and operating conditions can resume, all of which are uncertain and cannot be predicted. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts on our financial impactcondition and results of these items, including the fixed costs of our manufacturing facilities. COVID-19 also makes it more challenging for management to estimate future performance of our businesses, particularly over the near to medium term.operations.
Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain. We currently expect our results of operations for the second quarter of 2020 to be most significantly impacted. However, because of the dynamic nature of the crisis, we cannot accurately predict the extent or duration of the impacts of the COVID-19 pandemic.
Liquidity
In March of 2020, we drew down $250 million, the full amount available under the Revolving Credit Facility. In May of 2020, we entered into the Amendment that, among other changes as described in Note 13 to our Condensed Consolidated and Combined Financial Statements, waives the quarterly-tested leverage covenant and reduces the interest coverage ratio through and including the first quarter of 2021. Also in May, we issued the Notes with gross and net proceeds of $518 million and $503 million, respectively. We believe the Amendment, and the proceeds from the Revolving Credit Facility and the Notes, currently provide us with the appropriate level of flexibility to manage our operations. In future periods, the COVID-19 pandemic and its impact on the capital markets could impact our ability to obtain future financing.
As noted above, we are aligning our cost structure to the realities of the current operating environment. In the short term, we are focusing on actions to preserve liquidity by implementing pay cuts, furloughs and actively managing all discretionary spending. We are also taking additional actions to improve the long-term financial structure of the business.
Furthermore, we plan to continue utilizing certain provisions of the CARES Act enacted by the U.S. Government to provide additional short-term liquidity, including relief from employer payroll tax remittance, and we are evaluating other potential income tax impacts of the CARES Act. We are also evaluating provisions of similar legislation in other countries.
Acquisitions
Our growth strategy contemplates future acquisitions. 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.
On January 21, 2020, we acquired all of the shares of Matricel for cash consideration of approximately $44$43.6 million. Matricel, a German company, is a provider of biomaterials used in dental applications and is part of our Specialty Products and Technologies segment. For the three and six months ended July 3, 2020, Matricel’s revenue and earnings were not material to our Condensed Consolidated and Combined Statements of Operations.Operations for the three and six months ended July 3, 2020.
Foreign Currency Exchange Rates
On a period-over-period basis, currency exchange rates negativelypositively impacted reported sales by approximately 1.7%4.0% and 3.4% for both the three and six months ended July 3, 20202, 2021, respectively, compared to the comparable periods of 2019,2020, primarily due to the strength of most major currencies against the U.S. dollar against most major currencies.dollar. Any future strengthening of the U.S. dollar against major currencies would adversely 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, and any strengthening of the U.S. dollar against major currencies would negatively impact our sales and results of operations for the remainder of the year.
UK’s Referendum Decision to Exit the EU
In a referendum on June 23, 2016, voters approved for the United Kingdom (“UK”) to exit the European Union (“EU”). A withdrawal agreement negotiated by and between the UK prime minister and the EU was ratified by the UK parliament in December 2019. The UK exited the EU on January 31, 2020. A transition period began and business will remainremained as usual while the UK remains in the EU customs union until December 31, 2020. There is uncertainty as to what will occur afterThe new Trade and Cooperation Agreement signed by the EU and UK on December 31st deadline24, 2020 brings little benefits for our dental business, since almost all of our products are already 0% duty rated under the WTO tariffs, and the natureagreement neither includes any customs or tax simplification regime nor any mutual recognition of medical device regulations of the UK’s future relationship with the EU is still unclear. We continue to monitor the status of Brexit and plan for potential impacts.UK. To mitigate the potential impact of Brexit on the importsupply of our European goods to the UK, we have adapted our supply chain and financial flowsprocesses accordingly, and will temporarily increaseincreased our level of inventory within the UK if required.to ensure that our customers receive our products timely. Our operating companies have begun to work through the new UK regulations to register products with the MHRA (UK’s Medicines and Healthcare products Regulatory Agency) and meet the future requirements of MHRA for foreign manufacturers of medical devices which become effective on July 1, 2023. The ultimate impact of BrexitUK exiting the EU on our financial results is uncertain. For additional information, refer to “Item 1A. Risk Factors—General Risks” in our 2019 10-K.
Public Company Expenses
As a result of the Separation, we are subject to the Sarbanes-Oxley Act and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We are now required to have additional procedures and practices as a separate public company. As a result, we have incurred and will continue to incur additional personnel and corporate governance costs, including internal audit, investor relations, stock administration and regulatory compliance costs.
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 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 this report, referencesReferences 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 U.S. GAAP, but excluding:
•sales from acquired businesses;businesses for one year from the acquisition date;
•sales from discontinued products; and
•the impact of currency translation.
References to sales or operating profit attributable to acquisitions or acquired businesses refer to sales or operating profit, as applicable, from acquired businesses recorded prior to the first anniversary of the acquisition.
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.date. 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.
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 acquisitions because the timing, size, number and nature of such transactions can vary significantly from period-to-period and between us and our peers, which we believe may obscure underlying business trends and make comparisons of long-term performance difficult. 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. 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.
RESULTS OF OPERATIONS
As discussed above, | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | |
| ($ in millions) | July 2, 2021 | | July 3, 2020 | | | % Change |
| Sales | $ | 740.1 | | 100.0% | $ | 362.0 | | 100.0% | | 104.4 | % |
| Cost of sales | 328.2 | | 44.3% | 211.5 | | 58.4% | | 55.2 | % |
| Gross profit | 411.9 | | 55.7% | 150.5 | | 41.6% | | 173.7 | % |
| Operating costs: | | | | | | |
| Selling, general and administrative (“SG&A”) expenses | 283.1 | | 38.3% | 241.9 | | 66.8% | | 17.0 | % |
| Research and development (“R&D”) expenses | 30.3 | | 4.1% | 16.5 | | 4.6% | | 83.6 | % |
| Operating profit (loss) | 98.5 | | 13.3% | (107.9) | | (29.8)% | | (191.3) | % |
| Nonoperating income (expense): | | | | | | |
| Other income | 0.3 | | —% | 0.1 | | —% | | NM |
| Interest expense, net | (13.6) | | (1.8)% | (14.5) | | (4.0)% | | (6.2) | % |
| Earnings (loss) before income taxes | 85.2 | | 11.5% | (122.3) | | (33.8)% | | (169.7) | % |
| Income tax (benefit) expense | (4.9) | | (0.7)% | (28.8) | | (8.0)% | | (83.0) | % |
| Net income (loss) | $ | 90.1 | | 12.2% | $ | (93.5) | | (25.8)% | | (196.4) | % |
| | | | | | |
| Effective tax rate | (5.8) | % | | 23.5 | % | | | |
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended | | |
| ($ in millions) | July 2, 2021 | | July 3, 2020 | | | % Change |
| Sales | $ | 1,449.3 | | 100.0% | $ | 909.2 | | 100.0% | | 59.4 | % |
| Cost of sales | 640.1 | | 44.2% | 480.3 | | 52.8% | | 33.3 | % |
| Gross profit | 809.2 | | 55.8% | 428.9 | | 47.2% | | 88.7 | % |
| Operating costs: | | | | | | |
| SG&A expenses | 542.0 | | 37.4% | 510.6 | | 56.2% | | 6.1 | % |
| R&D expenses | 60.4 | | 4.2% | 51.2 | | 5.6% | | 18.0 | % |
| Operating profit (loss) | 206.8 | | 14.3% | (132.9) | | (14.6)% | | (255.6) | % |
| Nonoperating income (expense): | | | | | | |
| Other income | 0.6 | | —% | 0.2 | | —% | | NM |
| Interest expense, net | (31.6) | | (2.2)% | (17.8) | | (2.0)% | | 77.5 | % |
| Earnings (loss) before income taxes | 175.8 | | 12.1% | (150.5) | | (16.6)% | | (216.8) | % |
| Income tax expense (benefit) | 14.0 | | 1.0% | (39.8) | | (4.4)% | | (135.2) | % |
| Net income (loss) | $ | 161.8 | | 11.2% | $ | (110.7) | | (12.2)% | | (246.2) | % |
| | | | | | |
| Effective tax rate | 8.0 | % | | 26.4 | % | | | |
GAAP Reconciliation
Sales and Core Sales Growth
| | | | | | | | | | | |
| % Change Three Month Period Ended July 2, 2021 vs. Comparable 2020 Period | | % Change Six Month Period Ended July 2, 2021 vs. Comparable 2020 Period |
| Total sales growth (GAAP) | 104.4 | % | | 59.4 | % |
| Less the impact of: | | | |
| Discontinued products | 1.9 | % | | 2.6 | % |
| Currency exchange rates | (4.0) | % | | (3.4) | % |
| Core sales growth (non-GAAP) | 102.3 | % | | 58.6 | % |
For the COVID-19 pandemic has adversely impacted our overall resultsthree and six months ended July 2, 2021, sales and core sales increased in the majority of operationsthe markets in which we operate as demand increased due to more patients seeking dental care with more dental offices being open compared to 2020. Sales and core sales for the three and six months ended July 3, 2020.2020, were impacted by the COVID-19 pandemic.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | | |
| ($ in millions) | July 3, 2020 | | June 28, 2019 | | $ Variance | % Change |
| Sales | $ | 362.0 |
| 100.0 | % | | $ | 712.1 |
| 100.0 | % | | (350.1 | ) | (49.2 | )% |
| Cost of sales | 211.5 |
| 58.4 | % | | 318.5 |
| 44.7 | % | | (107.0 | ) | (33.6 | )% |
| Gross profit | 150.5 |
| 41.6 | % | | 393.6 |
| 55.3 | % | | (243.1 | ) | (61.8 | )% |
| Operating costs: | | | | | | | | |
| SG&A expenses | 241.9 |
| 66.8 | % | | 278.0 |
| 39.0 | % | | (36.1 | ) | (13.0 | )% |
| R&D expenses | 16.5 |
| 4.6 | % | | 39.7 |
| 5.6 | % | | (23.2 | ) | (58.4 | )% |
| Operating (loss) profit | (107.9 | ) | (29.8 | )% | | 75.9 |
| 10.7 | % | | (183.8 | ) | (242.2 | )% |
| Nonoperating income (expense), net | |
|
| | |
|
| | | |
| Other income | 0.1 |
| — | % | | 1.3 |
| 0.2 | % | | (1.2 | ) | NM |
|
| Interest expense, net | (14.5 | ) | (4.0 | )% | | — |
| — | % | | (14.5 | ) | NM |
|
| (Loss) earnings before income taxes | (122.3 | ) | (33.8 | )% | | 77.2 |
| 10.8 | % | | (199.5 | ) | (258.4 | )% |
| Income tax (benefit) expense | (28.8 | ) | (8.0 | )% | | 15.7 |
| 2.2 | % | | (44.5 | ) | (283.4 | )% |
| Net (loss) income | $ | (93.5 | ) | (25.8 | )% | | $ | 61.5 |
| 8.6 | % | | (155.0 | ) | (252.0 | )% |
| | | | | | | | | |
| Effective tax rate | 23.5 | % | | | 20.3 | % | | | | |
|
| | | | | | | | | | | | | | | | |
| | Six Months Ended | | | |
| ($ in millions) | July 3, 2020 | | June 28, 2019 | | $ Variance | % Change |
| Sales | $ | 909.2 |
| 100.0 | % | | $ | 1,371.8 |
| 100.0 | % | | (462.6 | ) | (33.7 | )% |
| Cost of sales | 480.3 |
| 52.8 | % | | 615.1 |
| 44.8 | % | | (134.8 | ) | (21.9 | )% |
| Gross profit | 428.9 |
| 47.2 | % | | 756.7 |
| 55.2 | % | | (327.8 | ) | (43.3 | )% |
| Operating costs: | | | | | | | | |
| SG&A expenses | 510.6 |
| 56.2 | % | | 552.9 |
| 40.3 | % | | (42.3 | ) | (7.7 | )% |
| R&D expenses | 51.2 |
| 5.6 | % | | 83.0 |
| 6.1 | % | | (31.8 | ) | (38.3 | )% |
| Operating (loss) profit | (132.9 | ) | (14.6 | )% | | 120.8 |
| 8.8 | % | | (253.7 | ) | (210.0 | )% |
| Nonoperating income (expense), net | |
|
| | |
|
| | | |
| Other income | 0.2 |
| — | % | | 1.4 |
| 0.1 | % | | (1.2 | ) | NM |
|
| Interest expense, net | (17.8 | ) | (2.0 | )% | | — |
| — | % | | (17.8 | ) | NM |
|
| (Loss) earnings before income taxes | (150.5 | ) | (16.6 | )% | | 122.2 |
| 8.9 | % | | (272.7 | ) | (223.2 | )% |
| Income tax (benefit) expense | (39.8 | ) | (4.4 | )% | | 22.8 |
| 1.7 | % | | (62.6 | ) | (274.6 | )% |
| Net (loss) income | $ | (110.7 | ) | (12.2 | )% | | $ | 99.4 |
| 7.2 | % | | (210.1 | ) | (211.4 | )% |
| | | | | | | | | |
| Effective tax rate | 26.4 | % | | | 18.7 | % | | | | |
SALES
GAAP Reconciliation
|
| | | | | |
| | % Change Three Month Period Ended July 3, 2020 vs. Comparable 2019 Period | | % Change Six Month Period Ended July 3, 2020 vs. Comparable 2019 Period |
| Total sales growth (GAAP) | (49.2 | )% | | (33.7 | )% |
| Less the impact of: | | | |
| Acquisitions | (0.3 | )% | | (0.2 | )% |
| Discontinued products | 1.6 | % | | 1.2 | % |
| Currency exchange rates | 1.7 | % | | 1.7 | % |
| Core sales growth (non-GAAP) | (46.2 | )% | | (31.0 | )% |
In response to COVID-19, many dental associations globally recommended that dental practices delay elective procedures and only perform emergency procedures. As a result, there were widespread temporary closures of dental practices around the world due to the pandemic, except to perform emergency procedures. DuringSales for the three months ended July 3, 2020, dental practices started2, 2021 increased 104.4% compared to reopen, however, the average practice’s patientcomparable period in 2020. Price positively impacted sales growth by 0.2% on period-over-period basis. Sales increased by 100.2% due to higher volume, has declined substantially from levels occurring beforeincluding the COVID-19 pandemic.impact of discontinued products and product mix. Sales in developed markets increased primarily due to an increase in North America, Western Europe, Japan and Australia. Sales in emerging markets increased primarily due to an increase in Russia and China.
Sales for the six months ended July 2, 2021 increased 59.4% compared to the comparable period in 2020. Price positively impacted sales growth by 0.3% on period-over-period basis. Sales increased by 55.7% due to higher volume, including the impact of discontinued products and product mix. Sales in developed markets increased primarily due to an increase in North America, Western Europe, Japan and Australia. Sales in emerging markets increased primarily due to China and Russia.
Core sales growth for the three and six months ended July 3, 2020, decreased 46.2%2, 2021 increased 102.3% and 58.6%, respectively, compared to the comparable period of 2019. Geographically, the decreaseperiods in core2020. Core sales growth wasincreased primarily due to lower core sales in North Americahigher volume and Western Europe during the three months ended July 3, 2020, as compared to the comparable period of 2019.product mix. Core sales in developed markets decreased 51.1% during the three months ended July 3, 2020, as compared to the comparable period of 2019,increased primarily due to declinesan increase in North America, Western Europe, Japan and North America.Australia. Core sales in emerging markets decreased 39.1% during the three months ended July 3, 2020, as compared to the comparable period of 2019,increased primarily due to a decline in Asia, Latin AmericaRussia and the Middle East.China.
Core sales growth for the six months ended July 3, 2020, decreased 31.0%, compared to the comparable period of 2019. Geographically, the decrease in core sales growth was primarily due to lower core sales in North America, Western Europe and China during the six months ended July 3, 2020, as compared to the comparable period of 2019. Core sales in developed markets decreased 33.1% during the six months ended July 3, 2020, as compared to the comparable period of 2019, primarily due to declines in North America and Western Europe. Core sales in emerging markets decreased 31.1% during the six months ended July 3, 2020, as compared to the comparable period of 2019, primarily due to a decline in Asia, Latin America and the Middle East.
COST OF SALES AND GROSS PROFIT
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | July 2, 2021 | | July 3, 2020 | | July 2, 2021 | | July 3, 2020 |
| Sales | $ | 740.1 | | | $ | 362.0 | | | $ | 1,449.3 | | | $ | 909.2 | |
| Cost of sales | 328.2 | | | 211.5 | | | 640.1 | | | 480.3 | |
| Gross profit | $ | 411.9 | | | $ | 150.5 | | | $ | 809.2 | | | $ | 428.9 | |
| Gross profit margin | 55.7 | % | | 41.6 | % | | 55.8 | % | | 47.2 | % |
The decreaseincrease in cost of sales during the three and six months ended July 3, 2020,2, 2021, as compared to the comparable periods in 2019,2020, was primarily due to lowerhigher sales as a result of the COVID-19 pandemic,higher demand as patients sought dental care with more dental offices being open compared to 2020, partially offset by improved sales mix, lower restructuring costs, excess capacity costsexpenses and the impact of foreign currency exchange rates.
The decreaseincrease in gross profit margin during the three and six months ended July 3, 2020,2, 2021, as compared to the comparable periods in 2019,2020, was primarily due primarily to higher sales volume, improved product mix, lower sales as a result of the COVID-19 pandemic, restructuring costs, excess capacity costs, an unfavorable sales mixexpenses and the impact of foreign currency exchange rates.incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
OPERATING EXPENSES
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | July 2, 2021 | | July 3, 2020 | | July 2, 2021 | | July 3, 2020 |
| Sales | $ | 740.1 | | | $ | 362.0 | | | $ | 1,449.3 | | | $ | 909.2 | |
| Selling, general and administrative expenses | $ | 283.1 | | | $ | 241.9 | | | $ | 542.0 | | | $ | 510.6 | |
| Research and development expenses | $ | 30.3 | | | $ | 16.5 | | | $ | 60.4 | | | $ | 51.2 | |
| SG&A as a % of sales | 38.3 | % | | 66.8 | % | | 37.4 | % | | 56.2 | % |
| R&D as a % of sales | 4.1 | % | | 4.6 | % | | 4.2 | % | | 5.6 | % |
The increasedecrease in SG&A expenses as a percentage of sales for the three and six months ended July 3, 2020,2, 2021, as compared to the comparable periods of 2019,2020, was primarily due to higher sales, lower sales, restructuring and productivity improvement expenses costs for legal matters and incremental public company costs, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
periods, partially offset by higher sales, marketing and administrative spend.
The decrease in R&D expenses as a percentage of sales for the three and six months ended July 3, 2020,2, 2021, as compared to the comparable periods of 2019,2020, was primarily due to a decreasethe increase in sales, offset by increased spending on product development initiatives in the Equipment & Consumables segment, partially offset by lower sales.initiatives.
OPERATING (LOSS) PROFIT
Operating lossprofit margin was 29.8%13.3% and 14.6%14.3% for the three and six months ended July 3, 2020,2, 2021, respectively, as compared to an operating profitloss margin of 10.7%29.8% and 8.8%,14.6% for the comparable periods of 2019,2020, respectively. The following factors impacted period-over-periodincrease in operating profit margin comparisons:
Lower saleswas primarily due to the impact of the COVID-19 pandemic, an unfavorablehigher sales volume and improved product mix, higherlower restructuring and productivity improvement expenses, excess capacity costs, incremental corporate costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.periods, partially offset by higher sales, marketing and administrative spend.
NONOPERATING INCOME (EXPENSE), NET
The Company disaggregates the service cost component of net periodic benefit costs from the other components of net periodic benefit costs and presents the other components of net periodic benefit costs in nonoperating income (expense), net. The other components of net periodic benefit costs included in nonoperatingother income, (expense), were $0.1$0.3 million and $1.3$0.1 million for the three months ended July 2, 2021 and July 3, 2020, and June 28, 2019, respectively, and $0.2$0.6 million and $1.4$0.2 million for the six months ended July 2, 2021 and July 3, 2020, and June 28, 2019, respectively.
INTEREST EXPENSE, NETCOSTS AND FINANCING
Interest costs were $13.6 million and $14.5 million for the three months ended July 2, 2021 and July 3, 2020, respectively, and $31.6 million and $17.8 million for the six months ended July 2, 2021 and July 3, 2020, respectively. The increase in interest expense for the six months ended July 2, 2021, as compared to the comparable period in 2020, is primarily due to our higher outstanding debt balances throughout the period, including $12.7 million in interest expense related to the Notes, which were issued in May 2020.
INCOME TAXES
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 2, 2021 | | July 3, 2020 | | July 2, 2021 | | July 3, 2020 |
| Effective tax rate | (5.8) | % | | 23.5 | % | | 8.0 | % | | 26.4 | % |
Our effective tax rates of (5.8)% and 8.0% for the three and six months ended July 3, 2020, as2, 2021, respectively, was lower compared to the comparable periods in 2019, is due to our outstanding debt balance of $2.0 billion. In conjunction with the Separation, we entered into the Credit Agreement, the proceeds of which were used to pay Danaher consideration for the transfer of the Dental business to us. In March of 2020 we drew down $250 million from our revolving line of credit and in May of 2020, we issued the Notes with a principal value of $518 million to provide additional liquidity in response to the COVID-19 pandemic. No borrowings existed during the three and six months ended June 28, 2019. For a discussion of our outstanding indebtedness, refer to Note 13 to our Condensed Consolidated and Combined Financial Statements in this Quarterly Report on Form 10-Q.
INCOME TAXES
Our effective tax rate of 23.5% and 20.3% for the three months ended July 3, 2020 and June 28, 2019, respectively and 26.4% and 18.7% for the six months ended July 3, 2020 and June 28, 2019, respectively, differ from the U.S. federal statutory rate of 21.0%, primarily due to our geographical mixan income tax benefit from the recognition of taxable earnings, includingan amortizable deferred tax asset associated with the impactestimated value of COVID-19a tax basis step-up of certain Swiss assets and a decrease in the three and six months ended July 3, 2020.valuation allowance related to Swiss net operating losses.
Our effective tax rate of 23.5% for the three months ended July 3, 2020, was higher compared to the comparable period in 2019 due to a change in our geographical mix of earnings primarily due to the impact of the pretax loss as a result of COVID-19 and a reduction in certain discrete tax benefits. Our effective tax rate of 26.4% for the six months ended July 3, 2020, was higher compared to the comparable period in 2019 due to a change in our geographical mix of earnings primarily due to the impact of the pretax loss as a result of COVID-19 and a reduction in certain discrete tax benefits.
COMPREHENSIVE INCOME (LOSS) INCOME
For the three months ended July 3, 2020,2, 2021, comprehensive lossincome was $60$105.1 million as compared to comprehensive incomeloss of $92$60.1 million for the comparable period of 2019.2020. For the six months ended July 3, 2020,2, 2021, comprehensive lossincome was $123$124.7 million as compared to comprehensive incomeloss of $92$123.0 million for the comparable period of 2019.2020. The decreaseincrease for both periodsthe three months ended July 2, 2021 was primarily due to net income generated in the prior year periodscurrent period compared to a net loss in the prior year period. The increase for the six months ended July 2, 2021 was primarily due to net income generated in the current period compared to a net loss in the prior year periods.period, partially offset by higher foreign currency translation losses.
RESULTS OF OPERATIONS - BUSINESS SEGMENTS
Sales by business segment were as follows ($ in millions):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | July 3, 2020 | | June 28, 2019 | | July 3, 2020 | | June 28, 2019 |
| Specialty Products & Technologies | $ | 184.6 |
| | $ | 347.3 |
| | $ | 457.2 |
| | $ | 696.1 |
|
| Equipment & Consumables | 177.4 |
| | 364.8 |
| | 452.0 |
| | 675.7 |
|
| Total | $ | 362.0 |
| | $ | 712.1 |
| | $ | 909.2 |
| | $ | 1,371.8 |
|
SPECIALTY PRODUCTSSpecialty Products & TECHNOLOGIES
Our Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, 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 | | Six Months Ended |
| ($ in millions) | July 2, 2021 | | July 3, 2020 | | July 2, 2021 | | July 3, 2020 |
| Sales | $ | 386.2 | | | $ | 184.6 | | | $ | 752.7 | | | $ | 457.2 | |
| Operating profit (loss) | $ | 74.1 | | | $ | (19.2) | | | $ | 154.6 | | | $ | (11.4) | |
| Operating profit (loss) as a % of sales | 19.2 | % | | (10.4) | % | | 20.5 | % | | (2.5) | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ($ in millions) | July 3, 2020 | | June 28, 2019 | | July 3, 2020 | | June 28, 2019 |
| Sales | $ | 184.6 |
| | $ | 347.3 |
| | $ | 457.2 |
| | $ | 696.1 |
|
| Operating (loss) profit | $ | (19.2 | ) | | $ | 54.5 |
| | $ | (11.4 | ) | | $ | 120.6 |
|
| Operating (loss) profit as a % of sales | (10.4 | )% | | 15.7 | % | | (2.5 | )% | | 17.3 | % |
Sales and Core Sales Growth
| | | | | | | | | | | |
| % Change Three Month Period Ended July 2, 2021 vs. Comparable 2020 Period | | % Change Six Month Period Ended July 2, 2021 vs. Comparable 2020 Period |
| Total sales growth (GAAP) | 109.2 | % | | 64.6 | % |
| Less the impact of: | | | |
| | | |
| | | |
| Discontinued products | — | % | | (0.1) | % |
| Currency exchange rates | (4.4) | % | | (3.8) | % |
| Core sales growth (non-GAAP) | 104.8 | % | | 60.7 | % |
|
| | | | | |
| | % Change Three Month Period Ended July 3, 2020 vs. Comparable 2019 Period | | % Change Six Month Period Ended July 3, 2020 vs. Comparable 2019 Period |
| Total sales growth (GAAP) | (46.8 | )% | | (34.3 | )% |
| Less the impact of: | | | |
| Acquisitions | (0.6 | )% | | (0.5 | )% |
| Discontinued products | 0.5 | % | | 0.9 | % |
| Currency exchange rates | 1.3 | % | | 1.5 | % |
| Core sales growth (non-GAAP) | (45.6 | )% | | (32.4 | )% |
Core sales growthSales for the three months ended July 3, 2020 decreased 45.6%2, 2021 increased 109.2%, compared to the comparable period of 2019. Geographically, the decrease in core2020. Price negatively impacted sales growth wasby 0.6% on a period-over-period basis. Sales increased by 105.4% due to higher volume and product mix as demand improved for implant systems and orthodontic products. Sales in developed markets increased primarily due to lower corean increase in North America and Western Europe. Sales in emerging markets increased primarily due to China and Russia.
Sales for the six months ended July 2, 2021 increased 64.6%, compared to the comparable period in 2020. Price negatively impacted sales growth by 0.3% on a period-over-period basis. Sales increased by 61.1% due to higher volume, including the impact of discontinued products and product mix as demand improved for implant systems and orthodontic products. Sales in developed markets increased primarily due to an increase in North America and Western Europe. Sales in emerging markets increased primarily due to China and Russia.
Core sales for the three and six months ended July 2, 2021, increased 104.8% and 60.7%, respectively, compared to the comparable periods in 2020 primarily due to higher volume and product mix as demand improved for implant systems and orthodontic products. Core sales in developed markets increased primarily due to an increase in North America and Western Europe. Core sales decreasedin emerging markets increased primarily due to China and Russia.
Operating Profit
Operating profit margin was 19.2% and 20.5% for implant systemsthe three and orthodontic products in most of the markets we serve primarily as a result of the COVID-19 pandemic.
Core sales growth for the six months ended July 3, 2020 decreased 32.4%,2, 2021, respectively, as compared to an operating profit margin of (10.4)% and (2.5)% for the comparable periodperiods of 2019. Geographically, the decrease2020. The increase in core sales growthoperating profit margin was primarily due to higher sales volume and improved product mix, lower core sales in North America, Western Europe and Asia. Core sales decreased for implant systems and orthodontic products in most of the markets we serve primarily as a result of the COVID-19 pandemic.
The following factors impacted period-over-period operating (loss) profit margin comparisons:
Lower sales with an unfavorable sales mix, higher restructuring and productivity improvement expenses, excess capacity costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.periods, partially offset by higher sales and marketing spend.
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; handpieces and associated consumables; treatment units and other dental practice equipment; endodontic systems and related consumables; and restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
Equipment & Consumables Selected Financial Data
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| ($ in millions) | July 2, 2021 | | July 3, 2020 | | July 2, 2021 | | July 3, 2020 |
| Sales | $ | 353.9 | | | $ | 177.4 | | | $ | 696.6 | | | $ | 452.0 | |
| Operating profit (loss) | $ | 57.0 | | | $ | (53.8) | | | $ | 115.6 | | | $ | (73.1) | |
| Operating profit (loss) as a % of sales | 16.1 | % | | (30.3) | % | | 16.6 | % | | (16.2) | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ($ in millions) | July 3, 2020 | | June 28, 2019 | | July 3, 2020 | | June 28, 2019 |
| Sales | $ | 177.4 |
| | $ | 364.8 |
| | $ | 452.0 |
| | $ | 675.7 |
|
| Operating (loss) profit | $ | (53.8 | ) | | $ | 29.2 |
| | $ | (73.1 | ) | | $ | 17.0 |
|
| Operating (loss) profit as a % of sales | (30.3 | )% | | 8.0 | % | | (16.2 | )% | | 2.5 | % |
Sales and Core Sales Growth
| | | | | | | | | | | |
| % Change Three Month Period Ended July 2, 2021 vs. Comparable 2020 Period | | % Change Six Month Period Ended July 2, 2021 vs. Comparable 2020 Period |
| Total sales growth (GAAP) | 99.5 | % | | 54.1 | % |
| Less the impact of: | | | |
| Discontinued products | 4.0 | % | | 5.4 | % |
| Currency exchange rates | (3.6) | % | | (3.0) | % |
| Core sales growth (non-GAAP) | 99.9 | % | | 56.5 | % |
Sales
For the three and six months ended July 2, 2021, sales and core sales increased in the majority of the markets in which we operate as demand increased due to more patients seeking dental care with more dental offices being open compared to 2020. Sales and core sales for the three and six months ended July 3, 2020 were impacted by the COVID-19 pandemic.
Sales for the three months ended July 2, 2021 increased 99.5% compared to the comparable period in 2020. Price positively impacted sales growth by 0.9% on a period-over-period basis. Sales increased by 95.0% due to higher volume, including the impact of discontinued products and product mix as demand improved for equipment and consumables. Sales in developed markets increased primarily due to an increase in North America and Western Europe. Sales in emerging markets increased primarily due to Russia and Eastern Europe, partially offset by lower sales in China and Brazil.
|
| | | | | |
| | % Change Three Month Period Ended July 3, 2020 vs. Comparable 2019 Period | | % Change Six Month Period Ended July 3, 2020 vs. Comparable 2019 Period |
| Total sales growth (GAAP) | (51.4 | )% | | (33.1 | )% |
| Less the impact of: | | | |
| Discontinued products | 2.6 | % | | 1.6 | % |
| Currency exchange rates | 1.9 | % | | 2.1 | % |
| Core sales growth (non-GAAP) | (46.9 | )% | | (29.4 | )% |
Core sales growth for the three months ended July 3, 2020 decreased 46.9%2, 2021 increased 99.9%, compared to the comparable period of 2019. Geographically, the decrease in core2020. Core sales growth wasincreased primarily due to lower core saleshigher volume, including the impact of discontinued products and product mix as demand improved for equipment and consumables. Sales in developed markets increased primarily due to an increase in North America and Western Europe. Core sales of equipmentSales in emerging markets increased primarily due to Russia and traditional consumables decreased in most of the markets we serve primarily as a result of the COVID-19 pandemic,Eastern Europe, partially offset by increased demand for our disinfecting products.
Core sales growth for the six months ended July 3, 2020 decreased 29.4%2, 2021 increased 56.5%, compared to the comparable period in 2020. Core sales increased primarily due to higher volume, including the impact of 2019. Geographically,discontinued products and product mix as demand improved for equipment and consumables. Sales in developed markets increased primarily due to an increase in North America and Western Europe. Sales in emerging markets increased primarily due to Russia, Eastern Europe and China.
Operating Profit
Operating profit margin was 16.1% and 16.6% for the decreasethree and six months ended July 2, 2021, respectively, as compared to an operating profit margin of (30.3)% and (16.2)% for the comparable periods of 2020. The increase in core sales growthoperating profit margin was primarily due to higher sales volume, improved product mix, lower core sales in North America, Western Europe and Asia. Core sales of equipment and traditional consumables decreased in most of the markets we serve primarily as a result of the COVID-19 pandemic, partially offset by increased demand for our disinfecting products.
The following factors impacted year-over-year operating (loss) profit margin comparisons:
Lower sales with an unfavorable sales mix, higher restructuring and productivity improvement expenses, excess capacity costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.periods, partially offset by higher sales and marketing spend.
INFLATION
The effect of inflation on our sales and net income (loss) income was not significant for the three and six months ended July 2, 2021 and July 3, 2020 and June 28, 2019.2020.
LIQUIDITY AND CAPITAL RESOURCES
Before the Separation, we were dependent upon Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of its operations. Our financial transactions were accounted for through our former parent investment, net account. Accordingly, none of Danaher’s cash, cash equivalents or debt has been assigned to us for the periods prior to the Separation.
As a result of the Separation, we no longer participate in Danaher’s cash management and financing operations. We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities.
We depend oncontinue to generate substantial cash from operating activities and believe that our operating cash flow from operations, cash on hand and funds available under our Revolving Credit Facility, which was fully drawn down on in March 2020. In May 2020, we received net proceeds of $503 million in connection with the Notes that we issued. In the future, we may depend on other debt financings and equity financings to finance our acquisition strategy, working capital needs and capital expenditures. While we expect to experience reduced cash flow from operations as a result of decreased revenues during the current operating environment resulting from the COVID-19 pandemic, we believe that these sources of funds will be adequateliquidity are sufficient to fund debt service requirementsallow us to manage our capital structure on a short-term and provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligationslong-term basis and working capital for at least the next 12 months.
If our cash flowscontinue investing in existing businesses and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay additional acquisitions, future investments and capital expenditures, seek additional capital, restructure or refinance our indebtedness, or sell assets. However, we cannot ensure that we will be able to obtain future debt or equity financings adequate for our future cash requirements on commercially reasonable terms or at all, which may be exacerbated due to the impact of the COVID-19 pandemic on the debt and equity markets. Significant delays in our ability to finance acquisitions or capital expenditures may materially and adversely affect our future sales prospects. In addition, we cannot ensure that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. The Credit Agreement also restricts our ability to enter into certain asset sales transactions. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due.
Following is an overview of our cash flows and liquidity:
Overview of Cash Flows and Liquidity
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| | Six Months Ended |
| | July 2, 2021 | | July 3, 2020 |
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| Net cash provided by (used in) operating activities | $ | 137.3 | | | $ | (57.6) | |
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| Acquisitions, net of cash acquired | $ | — | | | $ | (40.7) | |
| Payments for additions to property, plant and equipment | (28.5) | | | (21.4) | |
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| All other investing activities | 5.7 | | | 7.7 | |
| Net cash used in investing activities | $ | (22.8) | | | $ | (54.4) | |
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| Proceeds from issuance of convertible senior notes | $ | — | | | $ | 517.5 | |
| Payment of debt issuance and other deferred financing costs | (2.3) | | | (17.3) | |
| Proceeds from revolving line of credit | — | | | 249.8 | |
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| Repayment of borrowings | (475.6) | | | (0.1) | |
| Purchase of capped calls related to issuance of convertible senior notes | — | | | (20.7) | |
| Proceeds from stock option exercises | 13.8 | | | 5.0 | |
| All other financing activities | 1.0 | | | (1.1) | |
| Net cash (used in) provided by financing activities | $ | (463.1) | | | $ | 733.1 | |
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| | | | | | | |
| | Six Months Ended |
| ($ in millions) | July 3, 2020 | | June 28, 2019 |
| Net cash (used in) provided by operating activities | $ | (57.6 | ) | | $ | 112.7 |
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| Acquisitions, net of cash acquired | $ | (40.7 | ) | | $ | — |
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| Payments for additions to property, plant and equipment | (21.4 | ) | | (42.1 | ) |
| Proceeds from sales of property, plant and equipment | — |
| | 0.4 |
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| All other investing activities | 7.7 |
| | (0.2 | ) |
| Net cash used in investing activities | $ | (54.4 | ) | | $ | (41.9 | ) |
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| Proceeds from issuance of convertible senior notes | $ | 517.5 |
| | $ | — |
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| Payment of debt issuance costs and other deferred financing costs | (17.3 | ) | | — |
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| Proceeds from revolving line of credit | 249.8 |
| | — |
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| Repayment of borrowings | (0.1 | ) | | — |
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| Purchase of capped calls related to issuance of convertible senior notes | (20.7 | ) | | — |
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| Proceeds from stock option exercises | 5.0 |
| | — |
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| Net transfers to Former Parent | — |
| | (70.8 | ) |
| All other financing activities | (1.1 | ) | | — |
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| Net cash provided by (used in) financing activities | $ | 733.1 |
| | $ | (70.8 | ) |
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period due tofor working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impacting reported cash flows.
Net cash used inprovided by operating activities was $58$137.3 million during the six months ended July 3, 2020,2, 2021, as compared to cash provided by operating activities of $113 million in the comparable period in 2019. The increase in cash used in operating activities of $57.6 million for the comparable period of 2020. The increase was primarily due to ahigher net loss,income and changes in accrued liabilities, partially offset by higher levels oflower cash provided by working capital and lower levels of accrued expenses and other liabilities on a period-over-period basis.capital.
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 increaseddecreased by $13$31.6 million duringfor the six months ended July 3, 2020,2, 2021, as compared to the comparable period in 2019.2020. The increasedecrease was primarily due to no acquisition activity in the acquisition of Matricel in January 2020,current period, partially offset by lowerhigher purchases of property, plant and equipment. Matricel was acquired on January 21, 2020, for $40.7 million, net of acquired cash.
Financing Activities
Cash flows relating to financing activities consist primarily of cash flows associated with debt borrowings and the issuance of common stock and transfers to Danaher prior to the Separation.
Net cash provided byused in financing activities was $733$463.1 million during the six months ended July 3, 2020,2, 2021, compared to $71$733.1 million used inprovided by financing activities for the comparable period of 2019. The increase2020. In February 2021, we repaid $472.0 million of the Euro Term Loan Facility in cash provided by financing activities was primarily dueconnection with an amendment to drawing downthe Credit Agreement. In March 2020, we borrowed the full amount available under the Revolving Credit Facility and in MarchMay of 2020, we issued the Notes and received net proceeds received inof $502.5 million. In connection with the issuance of the Notes in May 2020, partially offset by the purchase ofwe purchased the Capped Calls of $21for $20.7 million. Furthermore, we had net transfers to Former Parent in the prior year period.
For a description of our outstanding debt as of July 3, 2020, the Senior Credit Facilities, the Amendment we entered into in May 2020 and the Notes,2, 2021, refer to Note 1312 to our Condensed Consolidated and Combined 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 and cash equivalents on hand asprimarily through our Revolving Credit Facility.
As of July 3, 2020.2, 2021, we had no borrowings outstanding under the Revolving Credit Facility.
Cash and Cash Requirements
Until the Separation, we were dependent upon Danaher for all of our working capital and financing requirements under Danaher’s centralized approach to cash management and financing of operations of its subsidiaries. Because we were part of Danaher for the periods prior to Separation, no cash, cash equivalents and borrowings were included in our Condensed and Combined Financial Statements for periods prior to the Separation. For all periods prior to the Separation, other financial transactions relating to our business operations were accounted for through our former parent investment, net account.
As of July 3, 2020,2, 2021, we held $822$553.9 million of cash and cash equivalents that were held on deposit with financial institutions. Of this amount, $643$211.3 million was held within the United States and $179$342.6 million was held outside of the United States. To preserve cash during these uncertain economic times, we have implemented various temporary cost reduction initiatives and have also accelerated and increased a planned spending reduction program that we believe will be substantially completed by the end of 2020. 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 and pension plans as required and support other business needs. We generally intend to use available cash and internally generated funds 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 Part II, Other Information, Item“Item 1A. Risk Factors.
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 CutsCut 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 July 3, 2020,2, 2021, we believe that we have sufficient sources of liquidity to satisfy our cash needs, including our cash needs in the United States.
Contractual Obligations
There were no material changes to our contractual obligations during the three and six months ended July 3, 2020,2, 2021, other than our borrowings under our Revolving Credit Facility and issuancethe repayment of $472.0 million of the Notes.Euro Term Loan Facility. For a discussion of our contractual obligations, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations” in the 20192020 10-K.
Off-Balance Sheet Arrangements
There were no material changes to the Company’s off-balance sheet arrangements described in the 20192020 10-K that would have a material impact on the Company’s Condensed Consolidated and Combined Financial Statements.
Amendment to Credit Agreement
On May 6, 2020, we entered into the Amendment to our Credit Agreement that, among other changes, waives the quarterly-tested leverage covenant and reduces the interest coverage ratio to 2.00 to 1.00 through and including the first quarter of 2021. In connection with this Amendment, the lenders obtained a first priority security interest in substantially all of our assets. The Amendment also imposes limitations on liens, indebtedness, asset sales, investments and acquisitions. In addition, we will be required to maintain a monthly-tested minimum liquidity covenant of $125 million during the waiver period. The Amendment increases the interest and fees payable under the Credit Agreement for the duration of the period during which the waiver of the debt covenants remains in effect. Substantially all terms of the Credit Agreement revert back to the original terms as soon as we submit a quarterly compliance certificate with debt covenants at pre-Amendment levels.
Notes
On May 21, 2020, we 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 $68 million principal amount of the Notes, was $518 million. The net proceeds from the issuance, after deducting purchasers’ discounts and estimated offering expenses, were $503 million. The Notes will accrue interest at a rate of 2.375% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes have an initial conversion rate of 47.5862 shares of our common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $21.01 per share of our common stock and is subject to adjustment upon the occurrence of specified events. The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture).
Capped CallDebt Financing Transactions
In connection with the offering of the Notes, we entered into the 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. The cost of $21 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
For a discussiondescription of our outstanding indebtedness,debt as of July 2, 2021, refer to Note 1312 to our Condensed Consolidated and Combined 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 20192020 10-K that have had a material impact on our Condensed Consolidated and Combined Financial Statements. However, we adopted ASC 326 on January 1, 2020, which requires us to estimate the allowance for credit losses using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses and are adjusted as necessary using the relevant information available.
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 (loss) may be required.
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 20192020 10-K. There were no material changes to this information reported in our 20192020 10-K during the quarter ended July 3, 2020.2, 2021.
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 July 3, 20202, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
There have been no material changes to legal proceedings from our 20192020 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 20192020 10-K.
Item 1A. Risk Factors
You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our 20192020 10-K and in Part II, “Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended April 3, 20202, 2021 (the “Q1 10-Q”), which could materially affect our business, financial position, or future results of operations. The risks described in our 20192020 10-K and Q1 10-Q, 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. The risk factors set forth below update, and should be read together with, the risk factors described in our 20192020 10-K and Q1 10-Q.
Risks Related to Our Business
The COVID-19 pandemic has had and could continue to have a material adverse effect on our business and results of operations.
Our global operations expose us to risks associated with public health crises and outbreaks of epidemic, pandemic, or contagious diseases, such as the current outbreak of COVID-19. To date, COVID-19 has had, and may continue to have, an adverse impact on our operations, our supply chains and distribution systems, and our revenues and expenses, including as a result of preventive and precautionary measures that we, our dental customers, other businesses, and governments are taking. During the three months ended July 3, 2020, dental practices started to reopen, however, the average practice’s patient volume remains below pre-COVID-19 levels. As dental practices reopen, dental associations have recommended enhanced safety, disinfection and social distancing protocols. These measures may remain in place for a significant period of time in certain regions and are likely to continue to adversely affect our business, results of operations and financial condition. Due to these impacts and measures, we have experienced and may continue to experience significant and unpredictable reductions in the demand for our products.
As a result of the COVID-19 outbreak, we have experienced significant business disruptions, including restrictions on our ability to travel and distribute our products, temporary closures of most of our facilities, as well as reduction in access to our customers due to prolonged shelter-in-place and/or self-quarantine mandates. For example, our corporate headquarters and many of our operations, including certain of our manufacturing facilities, are located in California, which has instituted shelter-in-place orders applicable to our employees in that region. As more business and activities have shifted on-line and most of our employees are working remotely due to these restrictions, we may also be more vulnerable to cyber security threats and attempts to breach our security networks. These unprecedented measures to slow the spread of the virus taken by local governments and health care authorities globally have had, and will continue to have, a significant negative impact on our operations and financial results.
Moreover, efforts to slow or prevent a recurrence of the spread of the virus are likely to continue to curtail the operations of our customers and their patients for an indeterminate period of time, impacting our operations as purchasing decisions are delayed or lost, increasing logistical complexities as a result of closed customer offices, sales and marketing efforts are postponed, and manufacturing operations are curtailed to adjust to declining sales. Our businesses could also be impacted should the disruptions from COVID-19 lead to changes in consumer behavior and spending, and our business may be particularly susceptible to these changes as a material portion of our products may be viewed as discretionary purchases and therefore more susceptible to any global or regional recession that may result from efforts to prevent or delay the spread of the virus. Additionally, the COVID-19 impact on the capital markets could affect our cost of borrowing and our ability to raise additional capital. There are certain limitations on our ability to mitigate the adverse financial impact of these items, including the fixed costs of our manufacturing facilities. COVID-19 also makes it more challenging for management to estimate future performance of our businesses, particularly over the near to medium term.
Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that we may undertake to address financial and operations challenges faced by our customers. We currently expect our results of operations for the second quarter of 2020 to be most significantly impacted. However, because of the dynamic nature of the crisis, we cannot accurately predict the extent or duration of the impacts of the COVID-19 pandemic.
In response to the negative impact of COVID-19 on the Company’s business, we have implemented various temporary cost reduction initiatives. These actions, as they relate to the Company's manufacturing operations, could reduce the efficiency of our manufacturing operations and could further adversely affect our results of operations. Future cost savings initiatives and other measures related to stopping the spread of COVID-19 could also adversely affect our research and development activities, which could negatively impact our growth strategies. As a result of the COVID-19 pandemic, we may experience delays in obtaining regulatory clearances and approvals to market our products.
As part of our efforts to reduce costs to mitigate the impact of COVID-19 on the Company, we have taken several actions related to our employees, including implementing temporary furloughs and reduced work schedules for a substantial number of our employees, implementing pay reductions, and reducing our overall workforce. Such steps, and further changes we may make in the future to reduce costs, may negatively impact our ability to attract and retain employees. For example, if furloughed employees do not return to work with us, including because they find new employment during the furlough, we may experience operational challenges that may impact our ability to resume operations in full. We may also face demands or requests from labor unions that represent our employees, whether in the course of our periodic renegotiation of our collective bargaining agreements, through bargaining relating to the shut down and/or reopening of our operations, or otherwise. We could also be materially adversely affected if we are unable to effectively address employment-related matters, including any employment-related litigation, or maintain satisfactory relations with our employees.
The Credit Agreement, as amended, contains covenants that restrict our ability to engage in certain transactions and, if not met, may impair our ability to respond to changing business and economic conditions. Moreover, the terms of the Credit Agreement require us to satisfy certain financial covenants. Should our future business and operations be significantly impaired by the continuing COVID-19 pandemic and associated economic disruptions over an extended period of time or otherwise, we may be unable to remain in compliance with our current financial covenants. In such event, the factors that adversely affect our business may also similarly adversely affect the capital markets, and we cannot assure that we would be able to negotiate alternative covenants or alternative financing on favorable terms if at all. Our failure to comply with the covenants contained in the Credit Agreement, including financial covenants, could result in an event of default, which could materially and adversely affect our results of operations and financial condition.
In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, which may result in a period of regional, national, and global economic slowdowns and/or recessions that could curtail or delay spending by our customers and affect demand for our products as well as increased risk of customer defaults or delays in payments. Additionally, we cannot assure you that conditions in the bank lending, capital and other financial markets will not continue to deteriorate as a result of the pandemic, or that our access to capital and other sources of funding will not become constrained or not be available on attractive terms, which could adversely affect the availability and terms of future borrowings, renewals or refinancings. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows. Due to the uncertain scope and duration of the pandemic and the continuing or additional measures that governmental authorities may take to mitigate it, as well as the uncertain timing of global recovery and economic normalization, we are unable to estimate the impacts on our operations and financial results.
Moreover, many risk factors set forth herein and in our 2019 10-K, should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
Our restructuring actions could have long-term adverse effects on our business.
We are currently implementing significant restructuring activities across our businesses to adjust our cost structure, and we may engage in similar restructuring activities in the future. These restructuring activities and our regular ongoing cost reduction activities (including in connection with the integration of acquired businesses) reduce our available talent, assets and other resources and could slow improvements in our products and services, adversely affect our ability to respond to customers, limit our ability to increase production quickly if demand for our products increases and trigger adverse public attention. In addition, delays in implementing planned restructuring activities or other productivity improvements, unexpected costs or failure to meet targeted improvements may diminish the operational or financial benefits we expect to realize from such actions. Moreover, we may not succeed in implementing present or future restructuring activities or cost reduction activities. Realizing the anticipated benefits from these initiatives, if any benefits are achieved at all, may take several years, and we may be unable to achieve our targeted cost efficiencies and gross margin improvements. Additionally, we may have insufficient access to capital to fund investments in these strategic initiatives, or our business strategy may change from time to time, which could delay our ability to implement initiatives that we believe are important to our business. Any of the circumstances described above could adversely impact our business and financial statements.
Risks Related to Our Indebtedness
We have outstanding indebtedness of approximately $2.1$1.4 billion, and in the future we may incur additional indebtedness. This indebtedness could adversely affect our businesses and our ability to meet our obligations.
As of July 3, 2020,30, 2021, we had outstanding indebtedness of approximately $2.1$1.4 billion, including approximately $1.6 billion$896.8 million under our Amended Credit Agreement, and $518$517.5 million under the Notes. Notes, and had an additional $750.0 million of borrowing capacity under the Revolving Credit Facility pursuant to the Amended Credit Agreement, with the ability to request further increases to the Revolving Credit Facility up to $350.0 million.
Please refer to Note 1312 to our condensed consolidated and combined financial statements included in this Quarterly Report. This debt could have important, adverse consequences to us and our security holders, including:
•increasing our vulnerability to adverse economic and industry conditions;
•limiting our ability to obtain additional financing;
•requiring the dedication of a substantial portion of our cash flow from operations to service our indebtedness, which will reduce the amount of cash available for other purposes;
•limiting our flexibility to plan for, or react to, changes in our businesses and industries;
•diluting the interests of our existing stockholders as a result of issuing shares of our common stock upon conversion of the Notes; and
•placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts due under our indebtedness, and our cash needs may increase in the future. The Amended Credit Agreement contains restrictive covenants that limit our ability to engage in activities that may be in our long-term interest, including for example EBITDA-based leverage and interest coverage ratios. If we breach any of these restrictions and cannot obtain a waiver from the lenders on favorable terms, subject to applicable cure periods, the outstanding indebtedness (and any other indebtedness with cross-default provisions) could be declared immediately due and payable, which would adversely affect our liquidity and financial statements. In addition, any failure to obtain and maintain credit ratings from independent rating agencies would adversely affect our cost of funds and could adversely affect our liquidity and access to the capital markets.
The risks described above will increase with the amount of indebtedness we incur, and in the future we may incur significant indebtedness in addition to the indebtedness described above.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful and may adversely affect our ability to pay dividends.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, or to dispose of material assets or operations, alter our dividend policy (if we pay dividends), seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The instruments that may govern our indebtedness in the future may restrict our ability to dispose of assets and may restrict the use of proceeds from those dispositions. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.
In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness will depend on the generation of cash flow by our subsidiaries, including certain international subsidiaries, and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make adequate distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal, tax and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, may materially adversely affect our business, financial condition and results of operations and our ability to satisfy our obligations under our indebtedness or pay dividends on our common stock.
We may be unable to raise the funds necessary to repurchase the Notes for cash following a fundamental change, or to pay any cash amounts due upon conversion, and our other indebtedness may limit our ability to repurchase the Notes or pay cash upon their conversion.
Holders of the Notes may require us to repurchase their Notes following a fundamental change at a cash repurchase price generally equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion, we will satisfy part or all of our conversion obligation in cash unless we elect to settle conversions solely in shares of our common stock. We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Notes or pay the cash amounts due upon conversion. In addition, applicable law, regulatory authorities and the agreements governing our other indebtedness may restrict our ability to repurchase the Notes or pay the cash amounts due upon conversion. Our failure to repurchase Notes or to pay the cash amounts due upon conversion when required will constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Notes.
The conditional conversion feature of the Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Notes is triggered, holders of Notes will be entitled to convert the Notes at any time during specified periods at their option. Unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share) and one or more holders elect to convert their Notes, we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for the Notes could adversely affect our reported financial condition and results.
The accounting method for reflecting the Notes on our balance sheet, accruing interest expense for the Notes and reflecting the underlying shares of our common stock in our reported diluted earnings per share may adversely affect our reported earnings and financial condition.
We expect that, under applicable accounting principles, the initial liability carrying amount of the Notes will be the fair value of a similar debt instrument that does not have a conversion feature, valued using our cost of capital for straight, unconvertible debt. We expect to reflect the difference between the net proceeds from the offering of the Notes and the initial carrying amount as a debt discount for accounting purposes, which will be amortized into interest expense over the term of the Notes. As a result of this amortization, the interest expense that we expect to recognize for the Notes for accounting purposes will be greater than the cash interest payments we will pay on the Notes, which will result in lower reported income or higher reported loss. The lower reported income or higher reported loss resulting from this accounting treatment could depress the trading price of our common stock and the Notes.
In addition, because we intend to settle conversions by paying the conversion value in cash up to the principal amount being converted and any excess in shares, we expect to be eligible to use the treasury stock method to reflect the shares underlying the Notes in our diluted earnings per share. Under this method, if the conversion value of the Notes exceeds their principal amount for a reporting period, then we will calculate our diluted earnings per share assuming that all the Notes were converted and that we issued shares of our common stock to settle the excess. However, if reflecting the Notes in diluted earnings per share in this manner is anti-dilutive, or if the conversion value of the Notes does not exceed their principal amount for a reporting period, then the shares underlying the Notes will not be reflected in our diluted earnings per share. In addition, if accounting standards change in the future and we are not permitted to use the treasury stock method, then our diluted earnings per share may decline. For example, in July 2019, the Financial Accounting Standards Board published an exposure draft proposing to amend these accounting standards to eliminate the treasury stock method for convertible instruments and instead require application of the if-converted method. Under that method, if it is adopted, diluted earnings per share would generally be calculated assuming that all the Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the if-converted method may reduce our reported diluted earnings per share.
Furthermore, if any of the conditions to the convertibility of the Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the Notes as a current, rather than a long-term, liability. This reclassification could be required even if no holders convert their Notes and could materially reduce our reported working capital.
The Capped Calls we entered into in connection with the Notes may affect the value of the Notes and our common stock.
In connection with the sale of the Notes, we entered into Capped Calls with the initial purchasers of the Notes, their respective affiliates and other financial institutions (the “option counterparties”). The Capped Calls are expected generally to reduce the potential dilution upon any conversion of the Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap.
In connection with establishing their hedges of the Capped Calls, the option counterparties or their affiliates entered into various derivative transactions with respect to our common stock. These parties may modify their hedge positions in the future by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so during any observation period related to a conversion of the Notes). This activity could cause or avoid an increase or a decrease in the market price of our common stock or the Notes.
We are subject to counterparty risk with respect to the Capped Calls.
The option counterparties are financial institutions, and we will be subject to the risk that any or all of them might default under the Capped Calls. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. Past global economic conditions have resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the Capped Calls with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the option counterparties.
We may be adversely affected by recent proposals to reform LIBOR.
Certain of our financial arrangements, including our Credit Agreement, are made at variable interest rates that use the London Interbank Offered Rate (“LIBOR”) (or metrics derived from or related to LIBOR), as a benchmark for establishing the interest rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new methods of calculating LIBOR to be established, or alternative reference rates to be established. The potential consequences cannot be fully predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us. Changes in market interest rates may influence our financing costs, returns on financial investments and the valuation of derivative contracts and could reduce our earnings and cash flows.
Risks Related to Ownership of Our Stock
The price of our common stock may continue to be volatile.
We have a limited trading history and there may be wide fluctuations in the market value of our common stock as a result of many factors. From our IPO through July 28, 2020,30, 2021, the sales price of our common stock as reported by the NYSE has ranged from a low sales price of $10.08 on March 19, 2020 to a high sales price of $33.30$46.52 on January 24, 2020.May 7, 2021. Factors that may cause the market price of our common stock to fluctuate, some of which may be beyond our control, include:
•our quarterly or annual earnings, or those of other companies in our industry;
•actual or anticipated fluctuations in our operating results;
•changes in earnings estimated by securities analysts or our ability to meet those estimates;
•the operating and stock price performance of other comparable companies;
•changes to the regulatory and legal environment in which we operate;
•market and business conditions related to COVID-19;
•overall market fluctuations and domestic and worldwide economic conditions; and
•other factors described in our 20192020 10-K and in this Quarterly Report.
Stock markets in general have experienced volatility recently that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, periods of volatility in the overall market and the market price of a company’s securities have often been followed by securities litigation brought against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Certain provisions in our amended and restated certificate of incorporation, our amended and restated bylaws, the Indenture governing the Notes, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt an unsolicited takeover not approved by our board of directors. These provisions include, among others:
the inability of our stockholders to call a special meeting;
the inability of our stockholders to act by written consent;
rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;
the right of our board of directors to issue preferred stock without stockholder approval;
the division of our board of directors into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult;
a provision that stockholders may only remove directors with cause;
the ability of our directors, and not stockholders, to fill vacancies (including those resulting from an enlargement of our board of directors) on our board of directors; and
the requirement that the affirmative vote of stockholders holding at least two-thirds of our voting stock is required to amend our amended and restated bylaws and certain provisions in our amended and restated certificate of incorporation.
Additionally, certain provisions in the Notes and the Indenture governing the Notes could make a third party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a fundamental change, then holders of the Notes will have the right to require us to repurchase their Notes for cash. In addition, if a takeover constitutes a make-whole fundamental change, then we may be required to temporarily increase the conversion rate. In either case, and in other cases, our obligations under the Notes and the Indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us or removing incumbent management, including in a transaction that holders of our securities may view as favorable.
In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the board of directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder.
We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is in the best interests of us and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
Conversion of the Notes may dilute the ownership interest of our stockholders or may otherwise depress the prices of our common stock.
The conversion of some or all of the Notes may dilute the ownership interests of our stockholders. Upon conversion of the Notes, we have the option to pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock. If we elect to settle our conversion obligation in shares of our common stock or a combination of cash and shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling by market participants because the conversion of the Notes could be used to satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
The issuance or sale of shares of our common stock, or rights to acquire shares of our common stock, could depress the trading price of our common stock and the Notes.
We may conduct future offerings of our common stock, preferred stock or other securities that are convertible into or exercisable for our common stock to finance our operations or fund acquisitions, or for other purposes. In addition, we have reserved 20,656,197 shares of common stock for the exercise of stock options or vesting of restricted stock units. The Indenture for the Notes does not restrict our ability to issue additional equity securities in the future. If we issue additional shares of our common stock or rights to acquire shares of our common stock, if any of our existing stockholders sells a substantial amount of our common stock, or if the market perceives that such issuances or sales may occur, then the trading price of our common stock, and, accordingly, the Notes may significantly decline. In addition, our issuance of additional shares of common stock will dilute the ownership interests of our existing common stockholders, including holders of Notes who have received shares of our common stock upon conversion of their Notes.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of equity securities during the period covered by this Quarterly Report on Form 10-Q other than those previously disclosed in a Current Report on Form 8-K filed on May 26, 2020.None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT INDEX
|
| | | | |
Exhibit
Number
| Description |
| 3.1 | |
| 3.2 | |
4.110.1 | |
4.2 | |
10.1 | Amendment No. 1 toAmended Credit Agreement, dated as of May 6, 2020,June 15, 2021, by and among Envista Holdings Corporation, each Guarantor party thereto, Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender, and the other Lenders party theretothereto. (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 11, 2020,June 16, 2021, Commission File No. 001-39054) |
10.231.1 | |
10.3 | |
10.4 | |
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)
|
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: July 30, 2020August 3, 2021 | By: | /s/ Howard H. Yu |
| | Howard H. Yu |
| | Senior Vice President and Chief Financial Officer |
| | |
Date: July 30, 2020August 3, 2021 | By: | /s/ Kari-Lyn Moore |
| | Kari-Lyn Moore |
| | Vice President and Chief Accounting Officer |
