ENVISTA HOLDINGS CORPORATION The following discussion and analysis of our financial condition and results of operations should be read in conjunction with other information, including our Condensed Consolidated Financial Statements and related notes included in Part I, Item 1, Financial Information, of this Quarterly Report on Form 10-Q, our consolidated and combined financial statements appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "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 toEnvista 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 theU.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, global supply chain disruptions and potential staffing shortages due to any federal, state or local vaccine mandates, the conditions in theU.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 trade policies and regulations, contractions or growth rates and cyclicality of markets we serve, the effect of the Divestiture on our business relationships, operating results, share price or business generally, the occurrence of any event or other circumstances that could give rise to the termination of the Purchase Agreement, the failure to satisfy any of the conditions to completion of the Divestiture, the failure to realize the expected benefits resulting from the Divestiture, 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, 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 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 and disruptions relating to war, terrorism, widespread protests and civil unrest, man-made and natural disasters, public health issues and other events, and other risks and uncertainties set forth under "Item 1A. Risk Factors" in the 2020 10-K and this Quarterly Report on Form 10-Q. 29 -------------------------------------------------------------------------------- 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 Financial Statements present our historical financial position, results of operations, changes in stockholders' equity and cash flows in accordance with GAAP. Sale of the KaVo Treatment Unit and Instrument Business OnSeptember 7, 2021 , we entered into the Purchase Agreement withPlanmeca andPlanmeca Oy , a privately-held Finnish company, as guarantor, pursuant to which we will sell toPlanmeca our KaVo Treatment Unit and Instrument Business for total consideration of up to$455 million , which includes a potential earn-out payment of up to$30 million , subject to certain adjustments as provided in the Purchase Agreement. The Purchase Agreement provides that we will sell the KaVo Treatment Unit and Instrument Business through the sale of certain assets, the transfer of the equity of certain of our subsidiaries, and the assumption byPlanmeca of certain liabilities and agreements, in each case used in or related to the KaVo Treatment Unit and Instrument Business. The transaction is expected to close at the end of 2021. The Divestiture was part of our strategy to structurally improve our long-term margins and represents a strategic shift with a major effect on our operations and financial results as described in AS 205-20. The pending sale meets the criteria to be accounted for as a discontinued operation. Accordingly, we have applied discontinued operations treatment for the Divestiture as required by ASC 205-20. In accordance with ASC 205-20, we reclassified the Divestiture to assets and liabilities held for sale on our Condensed Consolidated Balance Sheets as ofOctober 1, 2021 andDecember 31, 2020 and reclassified the financial results of the Divestiture in our Condensed Consolidated Statements of Operations for all periods presented. Our Condensed Consolidated Statements of Cash Flows for the three and nine months endedOctober 1, 2021 andOctober 2, 2020 include the financial results of the KaVo Treatment Unit and Instrument Business. We also revised our discussion and presentation of operating and financial results to be reflective of our continuing operations as required by ASC 205-20. All segment information and descriptions exclude the KaVo Treatment Unit and Instrument Business. With the sale of the KaVo Treatment Unit and Instrument business, we continue to make significant progress toward our long-term goal of re-calibrating our product portfolio to higher growth and higher margin segments. The Divestiture shifts our revenue mix from approximately 50% each for the Specialty Products & Technology and Equipment & Consumables segments to approximately 60% for the Specialty Products & Technology segment and approximately 40% for the Equipment & Consumables segment. The Specialty Products & Technology segment is a higher growth and higher margin business than the Equipment & Consumables segment. The Divestiture is a strategic shift that will allow us to focus more on higher value and higher margin consumables, imaging, and digital workflow solutions.
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 acrossNorth America ,Asia ,Europe , theMiddle East andLatin America . 30 -------------------------------------------------------------------------------- For the three and nine months endedOctober 1, 2021 , sales derived from customers outside ofthe United States were 49.8% and 50.6%, respectively, compared to the three and nine months endedOctober 2, 2020 of 48.3% and 49.7%, 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 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; 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 2020 10-K. COVID-19 The extent of the impact of 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 nine months endedOctober 1, 2021 , we continued to see positive signs of recovery in certain markets in which we operate, however, certain markets continue to be more adversely impacted than others. A worsening of the pandemic or impacts of new variants of the virus may lead to 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 globe have responded with fiscal policy actions to support the healthcare industry and economy as a whole. The magnitude and overall effectiveness of these actions remains uncertain. 31 -------------------------------------------------------------------------------- The severity of the impact of 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 the impact on our customers, the measures that have been and may be taken to contain the virus (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 to manufacture and source our products and to find suitable alternative products at reasonable prices, the impact of the pandemic and associated economic downturn on our ability to access 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 condition and results of operations. Our future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, continued or worsening supply chain disruptions, uncertain demand, staffing shortages due to any federal, state, and local vaccine mandates, and the impact of any initiatives or programs that we may undertake to address financial and operational challenges faced by our customers and suppliers. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain.
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. OnJanuary 21, 2020 , we acquired all of the shares of Matricel for cash consideration of approximately$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. Matricel's revenue and earnings were not material to our Condensed Consolidated Statements of Operations for the three and nine months endedOctober 2, 2020 . Foreign Currency Exchange Rates On a period-over-period basis, currency exchange rates positively impacted reported sales by 1.1% and 2.4% for the three and nine months endedOctober 1, 2021 , respectively, compared to the comparable periods of 2020, primarily due to the strength of most major currencies against theU.S. dollar. Any future weakening of theU.S. dollar against major currencies would positively impact our sales and results of operations for the remainder of the year, and any strengthening of theU.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 onJune 23, 2016 , voters approved for theUnited Kingdom ("UK") to exit theEuropean Union ("EU"). A withdrawal agreement negotiated by and between theUK prime minister and the EU was ratified by theUK parliament inDecember 2019 . TheUK exited the EU onJanuary 31, 2020 . A transition period began and business remained as usual untilDecember 31, 2020 . The new Trade and Cooperation Agreement signed by the EU andUK onDecember 24, 2020 brings little benefits for our dental business, since almost all of our products are already 0% duty rated under theWTO tariffs, and the agreement neither includes any customs or tax simplification regime nor any mutual recognition of medical device regulations of the EU andUK . To mitigate the potential impact of Brexit on the supply of our European goods to theUK , we have adapted our supply chain and financial processes accordingly, and temporarily increased our level of inventory within theUK to ensure that our customers receive our products timely. It is currently unclear whether the MHRA (UK's Medicines and Healthcare products Regulatory Agency) is sufficiently prepared to handle the increased volume of marketing authorization applications that it is likely to receive. Nevertheless, our operating companies have begun to work through the newUK regulations to register products with the MHRA and meet the future requirements of MHRA for foreign manufacturers of medical devices which become effective onJuly 1, 2023 . The ultimate impact ofUK exiting the EU on our financial results is uncertain. 32 -------------------------------------------------------------------------------- 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 References to the non-GAAP measure of core sales (also referred to as core revenues or sales/revenues from existing businesses) refer to sales calculated according to GAAP, but excluding: •sales from acquired businesses for one year from the acquisition date; •sales from discontinued products; and •the impact of currency translation. 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. 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 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. 33 -------------------------------------------------------------------------------- RESULTS OF OPERATIONS All comparisons, variances, increases or decreases discussed below are for the three and nine months endedOctober 1, 2021 compared to the three and nine months endedOctober 2, 2020 . Three Months Ended ($ in millions) October 1, 2021 October 2, 2020 % Change Sales$ 607.3 100.0%$ 547.2 100.0% 11.0 % Cost of sales 251.0 41.3% 238.8 43.6% 5.1 % Gross profit 356.3 58.7% 308.4 56.4% 15.5 % Operating costs: Selling, general and administrative ("SG&A") expenses 250.6 41.3% 226.8 41.4% 10.5 % Research and development ("R&D") expenses 24.0 4.0% 20.0 3.7% 20.0 % Operating profit 81.7 13.5% 61.6 11.3% 32.6 % Nonoperating income (expense): Other income 0.2 -% 0.2 -% NM Interest expense, net (12.0) (2.0)% (23.4) (4.3)% (48.7) % Income before income taxes 69.9 11.5% 38.4 7.0% 82.0 % Income tax (benefit) expense (10.3) (1.7)% 14.8 2.7% (169.6) % Income from continuing operations 80.2 13.2% 23.6 4.3% 239.8 % Income from discontinued operations, net of tax 12.7 2.1% 12.0 2.2% 5.8 % Net income $ 92.9 15.3% $ 35.6 6.5% 161.0 % Effective tax rate from continuing operations (14.7) % 38.5 % Nine Months Ended ($ in millions) October 1, 2021 October 2, 2020 % Change Sales$ 1,857.1 100.0%$ 1,312.8 100.0% 41.5 % Cost of sales 773.8 41.7% 598.0 45.6% 29.4 % Gross profit 1,083.3 58.3% 714.8 54.4% 51.6 % Operating costs: SG&A expenses 747.5 40.3% 681.3 51.9% 9.7 % R&D expenses 75.7 4.1% 63.5 4.8% 19.2 % Operating profit (loss) 260.1 14.0% (30.0) (2.3)% (967.0) % Nonoperating income (expense): Other income 0.8 -% 0.4 -% NM Interest expense, net (43.6) (2.3)% (41.2) (3.1)% 5.8 % Income (loss) before income taxes 217.3 11.7% (70.8) (5.4)% (406.9) % Income tax benefit (3.7) (0.2)% (22.2) (1.7)% (83.3) % Income (loss) from continuing operations 221.0 11.9% (48.6) (3.7)% (554.7) % Income (loss) from discontinued operations, net of tax 33.7 1.8% (26.5) (2.0)% (227.2) % Net income (loss)$ 254.7 13.7%$ (75.1) (5.7)% (439.1) % Effective tax rate from continuing operations (1.7) % 31.4 % 34
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GAAP Reconciliation
Sales and Core Sales Growth
% Change Three Month % Change Nine Month
Period Ended October Period Ended October
1, 2021 vs. 1, 2021 vs.
Comparable 2020 Comparable 2020
Period Period
Total sales growth (GAAP) 11.0 % 41.5 %
Less the impact of:
Discontinued products 0.3 % 0.4 %
Currency exchange rates (1.1) % (2.4) %
Core sales growth (non-GAAP) 10.2 % 39.5 %
For the three and nine months ended October 1, 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 nine months ended
October 2, 2020 , were impacted by the COVID-19 pandemic.
Sales for the three months ended October 1, 2021 increased 11.0% compared to the
comparable period in 2020. Price positively impacted sales growth by 0.7% on
period-over-period basis. Sales increased by 9.2% 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 and Japan . Sales in emerging markets increased primarily due to
an increase in Russia , China and India .
Sales for the nine months ended October 1, 2021 increased 41.5% compared to the
comparable period in 2020. Price positively impacted sales growth by 0.4% on
period-over-period basis. Sales increased by 38.7% 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 Eastern Europe , China and Russia .
Core sales growth for the three months ended October 1, 2021 increased 10.2%,
compared to the comparable period in 2020. Core sales increased primarily due to
higher volume and product mix. Core sales in developed markets increased
primarily due to an increase in North America , Western Europe and Japan . Core
sales in emerging markets increased primarily due to an increase in Russia ,
China and India .
Core sales growth for the nine months ended October 1, 2021 increased 39.5%,
compared to the comparable period in 2020. Core sales increased primarily due to
higher volume and product mix. Core sales in developed markets increased
primarily due to an increase in North America , Western Europe , Japan and
Australia . Core sales in emerging markets increased primarily due to Eastern
Europe , China and Russia .
COST OF SALES AND GROSS PROFIT
Three Months Ended Nine Months Ended
($ in millions) October 1, 2021 October 2, 2020 October 1, 2021 October 2, 2020
Sales $ 607.3 $ 547.2 $ 1,857.1 $ 1,312.8
Cost of sales 251.0 238.8 773.8 598.0
Gross profit $ 356.3 $ 308.4 $ 1,083.3 $ 714.8
Gross profit margin 58.7 % 56.4 % 58.3 % 54.4 %
35-------------------------------------------------------------------------------- The increase in cost of sales during the three months endedOctober 1, 2021 , as compared to the comparable period in 2020, was primarily due to higher sales as a result of higher demand as patients sought dental care with more dental offices being open compared to 2020, partially offset by improved sales mix and favorable incremental period-over-period savings associated with productivity improvement actions taken in prior periods. The increase in cost of sales during the nine months endedOctober 1, 2021 , as compared to the comparable period in 2020, was primarily due to higher sales as a result of higher demand as patients sought dental care with more dental offices being open compared to 2020, partially offset by improved sales mix and favorable foreign exchange rates. The increase in gross profit margin during the three months endedOctober 1, 2021 , as compared to the comparable period in 2020, was primarily due to higher sales volume, improved product mix and a favorable incremental period-over-period savings associated with productivity improvement actions taken in prior periods. The increase in gross profit margin during the nine months endedOctober 1, 2021 , as compared to the comparable period in 2020, was primarily due to higher sales volume, improved product mix and favorable foreign exchange rates. OPERATING EXPENSES Three Months Ended Nine Months Ended ($ in millions) October 1, 2021 October 2, 2020 October 1, 2021 October 2, 2020 Sales$ 607.3 $
547.2
226.8
$ 24.0 $ 20.0 $ 75.7 $ 63.5
SG&A as a % of sales 41.3 % 41.4 % 40.3 % 51.9 %
R&D as a % of sales 4.0 % 3.7 % 4.1 % 4.8 %
SG&A expenses as a percentage of sales for the three months ended October 1,
2021 remained consistent with the comparable period of 2020.
SG&A expenses as a percentage of sales for the nine months ended October 1, 2021
decreased as compared to the comparable period of 2020, primarily due to higher
sales, lower restructuring expenses and favorable incremental period-over-period
savings associated with restructuring improvement actions taken in prior
periods, partially offset by higher sales and marketing, compensation and
administrative spend.
The increase in R&D expenses as a percentage of sales for the three months ended
October 1, 2021 , as compared to the comparable period of 2020, was primarily due
to increased spending on product development initiatives in the Specialty
Products & Technologies segment.
The decrease in R&D expenses as a percentage of sales for the nine months ended
October 1, 2021 , as compared to the comparable period of 2020, was primarily due
to higher sales, partially offset by increased spending on product development
initiatives in the Specialty Products & Technologies segment.
OPERATING PROFIT
Operating profit margin was 13.5% for the three months ended October 1, 2021 , as
compared to an operating profit margin of 11.3% for the comparable period of
2020. The increase in operating profit margin was primarily due to higher sales
volume and improved product mix, partially offset by higher sales and marketing,
compensation and administrative spend.
Operating profit margin was 14.0% for the nine months ended October 1, 2021 , as
compared to an operating loss margin of (2.3)% for the comparable period of
2020. The increase in operating profit margin was primarily due to higher sales
volume and improved product mix, lower restructuring expenses, favorable
incremental period-over-period savings associated with restructuring improvement
actions taken in prior periods, partially offset by higher sales and marketing,
compensation, and administrative spend.
OTHER INCOME
The other components of net periodic benefit costs included in other income,
were $0.2 million for each of the three months ended October 1, 2021 and October
2, 2020 , and $0.8 million and $0.4 million for the nine months ended October 1,
2021 and October 2, 2020 , respectively.
36
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INTEREST COSTS AND FINANCING
Interest costs were $12.0 million and $23.4 million for the three months ended
October 1, 2021 and October 2, 2020 , respectively, and $43.6 million and $41.2
million for the nine months ended October 1, 2021 and October 2, 2020 ,
respectively. The decrease in interest expense for the three months ended
October 1, 2021 as compared to the comparable period of 2020 was primarily due
to lower debt levels as a result of paying down the Euro Term Loan in the amount
of $472.0 million . In addition, we had lower interest rates on the outstanding
debt as a result of entering into the amendment to the Credit Agreement in
February of 2021. Interest expense for the nine months ended October 1, 2021 and
October 2, 2020 remained consistent.
INCOME TAXES
Three Months Ended Nine Months Ended
October 1, 2021
38.5 % (1.7) % 31.4 %
Our effective tax rates of (14.7)% and (1.7)% from continuing operations for the
three and nine months ended October 1, 2021 , respectively, was lower compared to
the comparable periods in 2020 primarily due to an income tax benefit from the
recognition of an amortizable deferred tax asset associated with the value of a
tax basis step-up of certain Swiss assets and a decrease in the valuation
allowance related to Swiss net operating losses.
COMPREHENSIVE INCOME (LOSS)
For the three months ended October 1, 2021 , comprehensive income was $69.2
million as compared to $55.9 million for the comparable period of 2020. For the
nine months ended October 1, 2021 , comprehensive income was $193.9 million as
compared to comprehensive loss of $67.1 million for the comparable period of
2020. The increase for the three months ended October 1, 2021 was primarily due
to net income generated in the current period, partially offset by foreign
currency translation losses. The increase for the nine months ended October 1,
2021 was primarily due to net income generated in the current period compared to
a net loss in the prior year period, partially offset by higher foreign currency
translation losses.
RESULTS OF OPERATIONS - BUSINESS SEGMENTS
Specialty Products & Technologies
Our Specialty Products & Technologies segment develops, manufactures and markets
dental implant systems, dental prosthetics and associated treatment software and
technologies, as well as orthodontic bracket systems, aligners and lab products.
Specialty Products & Technologies Selected Financial Data
Three Months Ended Nine Months Ended
($ in millions) October 1, 2021 October 2, 2020 October 1, 2021 October 2, 2020
Sales $ 363.4 $ 316.9 $ 1,116.1 $ 774.1
Operating profit $ 61.5 $ 41.4 $ 211.6 $ 26.2
Operating profit as a % of sales 16.9 % 13.1 % 19.0 % 3.4 %
37
--------------------------------------------------------------------------------Sales and Core Sales Growth
% Change Three Month % Change Nine Month
Period Ended October Period Ended October
1, 2021 vs. 1, 2021 vs.
Comparable 2020 Comparable 2020
Period Period
Total sales growth (GAAP) 14.7 % 44.2 %
Less the impact of:
Discontinued products - % (0.1) %
Currency exchange rates (1.4) % (2.8) %
Core sales growth (non-GAAP) 13.3 % 41.3 %
Sales
For the three and nine months endedOctober 1, 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 nine months endedOctober 2, 2020 were impacted by the COVID-19 pandemic. Sales for the three months endedOctober 1, 2021 increased 14.7%, compared to the comparable period in 2020. Price positively impacted sales growth by 0.2% on a period-over-period basis. Sales increased by 13.1% due to higher volume and product mix as demand improved for implant systems and orthodontic products. Sales in developed markets increased primarily due to an increase inNorth America andWestern Europe . Sales in emerging markets increased primarily due toChina ,Russia andIndia . Sales for the nine months endedOctober 1, 2021 increased 44.2%, compared to the comparable period in 2020. Price negatively impacted sales growth by 0.1% on a period-over-period basis. Sales increased by 41.5% 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 inNorth America ,Western Europe ,Japan andAustralia . Sales in emerging markets increased primarily due toEastern Europe ,India ,China andRussia . Core sales for the three months endedOctober 1, 2021 increased 13.3%, compared to the comparable period 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 inNorth America andWestern Europe . Core sales in emerging markets increased primarily due toChina ,Russia andIndia . Core sales for the nine months endedOctober 1, 2021 increased 41.3%, compared to the comparable period 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 inNorth America ,Western Europe ,Japan andAustralia . Core sales in emerging markets increased primarily due toEastern Europe ,India ,China andRussia . Operating Profit Operating profit margin was 16.9% and 19.0% for the three and nine months endedOctober 1, 2021 , respectively, as compared to an operating profit margin of 13.1% and 3.4% for the comparable periods of 2020. The increase in operating profit margin was primarily due to higher sales volume and improved product mix, lower restructuring expenses, incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods, partially offset by higher sales and marketing and compensation 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; endodontic systems and related consumables; restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products. 38 --------------------------------------------------------------------------------
Equipment & Consumables Selected Financial Data
Three Months Ended Nine Months Ended
($ in millions) October 1, 2021 October 2, 2020 October 1, 2021 October 2, 2020
Sales $ 243.9 $ 230.3 $ 741.0 $ 538.7
Operating profit $ 45.4 $ 38.9 $ 131.0 $ 11.0
Operating profit as a % of sales 18.6 % 16.9 % 17.7 % 2.0 %
Sales and Core Sales Growth
% Change Three Month % Change Nine Month
Period Ended October Period Ended October
1, 2021 vs. 1, 2021 vs.
Comparable 2020 Comparable 2020
Period Period
Total sales growth (GAAP) 5.9 % 37.6 %
Less the impact of:
Discontinued products 0.8 % 1.1 %
Currency exchange rates (0.7) % (1.6) %
Core sales growth (non-GAAP) 6.0 % 37.1 %
Sales
For the three and nine months endedOctober 1, 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 nine months endedOctober 2, 2020 were impacted by the COVID-19 pandemic. Sales for the three months endedOctober 1, 2021 increased 5.9% compared to the comparable period in 2020. Price positively impacted sales growth by 1.5% on a period-over-period basis. Sales increased by 3.7% 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 inNorth America ,Western Europe andJapan . Sales in emerging markets increased primarily due toEastern Europe ,Russia , andBrazil , partially offset by lower sales inChina . Sales for the nine months endedOctober 1, 2021 increased 37.6% compared to the comparable period in 2020. Price positively impacted sales growth by 1.2% on a period-over-period basis. Sales increased by 34.8% 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 inNorth America ,Western Europe andAustralia . Sales in emerging markets increased primarily due toRussia ,Brazil andEastern Europe , partially offset by lower sales inIndia . Core sales growth for the three months endedOctober 1, 2021 increased 6.0%, compared to the comparable period in 2020. Core sales increased primarily 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 inNorth America ,Western Europe andJapan . Core sales in emerging markets increased primarily due toEastern Europe ,Russia , andBrazil , partially offset by lower sales inChina . Core sales growth for the nine months endedOctober 1, 2021 increased 37.1%, compared to the comparable period in 2020. Core sales increased primarily due to higher volume, including the impact of discontinued products and product mix as demand improved for equipment and consumables. Core sales in developed markets increased primarily due to an increase inNorth America ,Western Europe andAustralia . Core sales in emerging markets increased primarily due toRussia ,Eastern Europe andBrazil ; partially offset by lower sales inIndia . 39 --------------------------------------------------------------------------------
Operating Profit
Operating profit margin was 18.6% for the three months endedOctober 1, 2021 , as compared to an operating profit margin of 16.9% for the comparable period of 2020. The increase in operating profit margin was primarily due to higher sales volume, improved product mix, and lower restructuring expenses, partially offset by higher administrative spend. Operating profit margin was 17.7% for the nine months endedOctober 1, 2021 , as compared to an operating profit margin of 2.0% for the comparable period of 2020. The increase in operating profit margin was primarily due to higher sales volume, improved product mix, lower restructuring expenses, and favorable incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods, partially offset by higher compensation and administrative spend. INFLATION The effect of inflation on our sales and net income (loss) was not significant for the three and nine months endedOctober 1, 2021 andOctober 2, 2020 . LIQUIDITY AND CAPITAL RESOURCES We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We continue to generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity are sufficient to allow us to manage our capital structure on a short-term and long-term basis and continue investing in existing businesses and consummating strategic acquisitions. Following is an overview of our cash flows and liquidity: Overview of Cash Flows and Liquidity
Nine Months Ended
October 1, 2021 October 2, 2020
Net cash provided by operating activities $ 225.6 $ 90.5
Acquisitions, net of cash acquired $ - $ (40.7)
Payments for additions to property, plant and equipment (46.0) (34.6)
Proceeds from sales of property, plant and equipment 11.6 -
All other investing activities 8.5 11.3
Net cash used in investing activities $ (25.9) $ (64.0)
Proceeds from issuance of convertible senior notes $ - $ 517.5 Payment of debt issuance and other deferred financing costs (2.3) (17.2) Proceeds from revolving line of credit - 249.8 Repayment of revolving line of credit - (250.0) Repayment of borrowings (475.7) -
Purchase of capped calls related to issuance of convertible senior notes
- (20.7)
Proceeds from stock option exercises 16.0 8.7
All other financing activities (5.4) 0.6
Net cash (used in) provided by financing activities $ (467.4) $ 488.7
40-------------------------------------------------------------------------------- Operating Activities Cash flows from operating activities can fluctuate significantly from period-to-period for working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impacting reported cash flows. Net cash provided by operating activities was$225.6 million during the nine months endedOctober 1, 2021 , as compared to cash used in operating activities of$90.5 million for the comparable period of 2020. The increase was primarily due to higher net income, partially offset by lower cash provided by working 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 decreased by$38.1 million for the nine months endedOctober 1, 2021 , as compared to the comparable period in 2020. The decrease was primarily due to no acquisition activity in the current period and proceeds received from the sale of property, plant and equipment, partially offset by higher purchases of property, plant and equipment. Matricel was acquired onJanuary 21, 2020 , for$40.7 million , net of acquired cash. Financing Activities and Indebtedness Cash flows relating to financing activities consist primarily of cash flows associated with debt borrowings and the issuance of common stock. Net cash used in financing activities was$467.4 million during the nine months endedOctober 1, 2021 , compared to$488.7 million provided by financing activities for the comparable period of 2020. InFebruary 2021 , we repaid$472.0 million of the Euro Term Loan Facility in connection with an amendment to the Credit Agreement. InMarch 2020 , we borrowed the full amount available under the Revolving Credit Facility and repaid it inSeptember 2020 ; and in May of 2020, we issued the Notes and received net proceeds of$502.5 million . In connection with the issuance of the Notes, we purchased the Capped Calls for$20.7 million . For a description of our outstanding debt as ofOctober 1, 2021 , refer to Note 13 to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q. We intend to satisfy any short-term liquidity needs that are not met through operating cash flow and available cash primarily through our Revolving Credit Facility. As ofOctober 1, 2021 , we had no borrowings outstanding under the Revolving Credit Facility. Cash and Cash Requirements As ofOctober 1, 2021 , we held$638.8 million of cash and cash equivalents that were held on deposit with financial institutions. Of this amount,$228.4 million was held withinthe United States and$410.4 million was held outside ofthe United States . We will continue to have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties, fund our restructuring activities 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 "Item 1A. Risk Factors-Risks Related to Our Business" in our 2020 10-K. While repatriation of some cash held outsidethe United States may be restricted by local laws, most of our foreign cash could be repatriated tothe United States . Following enactment of the Tax Cut and Jobs Act of 2017 ("TCJA") and the associated transition tax, in general, repatriation of cash tothe United States can be completed with no incrementalU.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 ofOctober 1, 2021 , we believe that we have sufficient sources of liquidity to satisfy our cash needs, including our cash needs inthe United States . 41 -------------------------------------------------------------------------------- Contractual Obligations There were no material changes to our contractual obligations during the three and nine months endedOctober 1, 2021 , other than the repayment of$472.0 million of the 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 2020 10-K. Off-Balance Sheet Arrangements There were no material changes to the Company's off-balance sheet arrangements described in the 2020 10-K that would have a material impact on the Company's Condensed Consolidated Financial Statements. Debt Financing Transactions For a description of our outstanding debt as ofOctober 1, 2021 , refer to Note 13 to our Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
Sale of the KaVo Treatment Unit and Instrument Business We plan to use the net proceeds from the Divestiture to continue our product portfolio transformation with a disciplined approach to capital deployment.
CRITICAL ACCOUNTING ESTIMATES
There were no material changes to our critical accounting estimates described in the 2020 10-K that have had a material impact on our Condensed Consolidated Financial Statements.
The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and difficult to predict. If actual results are not consistent with management's estimates and assumptions used for valuation allowances, contingencies, potential impairments, revenue recognition and income taxes, the related account balances may be overstated or understated and a charge or credit to net income (loss) may be required.
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