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 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 endedDecember 31, 2019 (the "2019 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, the conditions in the global economy, the markets served by us and the financial markets, developments and uncertainties inU.S. policy stemming from theU.S. administration, such as changes inU.S. trade and tariff policies and the reaction of other countries thereto, 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, the impact of our debt obligations on our operations and liquidity, 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 theUnited Kingdom's decision to leave the EU), disruptions relating to war, terrorism, 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 2019 10-K and this Quarterly Report on Form 10-Q. 26
-------------------------------------------------------------------------------- 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 equity and cash flows in accordance with accounting principles generally accepted inthe 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 22 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. 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,
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 acrossNorth America ,Asia ,Europe , theMiddle East andLatin America . 27 -------------------------------------------------------------------------------- During the three months endedApril 3, 2020 and year endedDecember 31, 2019 , sales derived from customers outside ofthe United States were 55% and 56%, 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 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 than 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. InChina , we were one of the first to donate infection prevention products to theWuhan government and our Orascoptic business has donated eye protection to hundreds of healthcare professionals inthe 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, we have increased our investment in our infection control and prevention business by doubling shipments of medical grade disinfectant products and are further increasing our investment to expand capacity by the end ofJune 2020 . 28 -------------------------------------------------------------------------------- We continue transforming our portfolio by investing in our implant and clear aligner products and also making investments in emerging markets. The cost reduction initiatives we have taken and will 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 made significant progress on the regulatory approval of N1 and are on track with our current timeline for availability inEurope in 2020. OurNobel Biocare business has obtained the EU Medical Device Regulation ("MDR") Quality Management System certification and is one of the first in the dental industry to do so. This is an important milestone forNobel Biocare and shows 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 have recommended that dental practices delay elective procedures and only perform emergency procedures. 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. There have been widespread temporary closures of dental practices around the world due to the pandemic, except to perform emergency procedures. 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. We expect the ultimate significance of the impact of these disruptions, including the extent of their adverse impact on our financial and operational results, to be dependent on the length of time that such disruptions continue which will, in turn, depend on the currently unknowable duration of the COVID-19 pandemic and 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 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. 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. OnMay 6, 2020 , we entered into the Amendment that, among other changes as described in Note 13 to our Condensed Consolidated and Combined Financial Statements in this Quarterly Report on Form 10-Q, waives the quarterly-tested leverage covenant and reduces the interest coverage ratio through and including the first quarter of 2021. We believe this Amendment and the proceeds from the Revolving Credit Facility 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. 29 -------------------------------------------------------------------------------- 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. Further, we plan to utilize certain provisions of the CARES Act enacted by theU.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. OnJanuary 21, 2020 , we acquired all of the shares of Matricel for cash consideration of approximately$45 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 months endedApril 3, 2020 , Matricel's revenue and earnings were not material to our Condensed Consolidated and Combined Statements of Operations.
Currency Exchange Rates
On a period-over-period basis, currency exchange rates negatively impacted reported sales by approximately 1.5% for the three months endedApril 3, 2020 , compared to the comparable period of 2019, primarily due to the strength of theU.S. dollar against most major currencies. Any future strengthening of theU.S. dollar against major currencies would adversely impact our sales and results of operations for the remainder of the year, and any weakening of theU.S. dollar against major currencies would positively impact our sales and results of operations for the remainder of the year.
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 will remain as usual while theUK remains in the EU customs union untilDecember 31, 2020 . There is uncertainty as to what will occur after theDecember 31st deadline and the nature of theUK's future relationship with the EU is still unclear. We continue to monitor the status of Brexit and plan for potential impacts. To mitigate the potential impact of Brexit on the import of goods to theUK , we have adapted our supply chain and financial flows accordingly, and will temporarily increase our level of inventory within theUK if required. The ultimate impact of Brexit 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.
30
--------------------------------------------------------------------------------Non-GAAP Measures
In this report, references to the non-GAAP measure of core sales (also referred to as core revenues or sales/revenues from existing businesses) refer to sales calculated according toU.S. GAAP, but excluding:
• sales from acquired businesses;
• 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 products that we have made the decision to discontinue as part of a portfolio restructuring. Discontinued brands or products consist of those which we (1) are no longer manufacturing, (2) are no longer investing in the research or development of, and (3) expect to discontinue all significant sales of within one year from the decision date to discontinue. The portion of sales attributable to discontinued brands or products is calculated as the net decline of the applicable discontinued brand or product from period-to-period.
The portion of sales attributable to currency translation is calculated as the difference between:
• the period-to-period change in sales; and
• the period-to-period change in sales after applying current period foreign
exchange rates to the prior year period.
Core sales growth should be considered in addition to, and not as a replacement
for or superior to, sales, and may not be comparable to similarly titled
measures reported by other companies. We believe that reporting the non-GAAP
financial measure of core sales growth provides useful information to investors
by helping identify underlying growth trends in our on-going business and
facilitating comparisons of our sales performance with our performance in prior
and future periods and to our peers. We also use core sales growth to measure
our operating and financial performance. We exclude the effect of currency
translation from core sales because currency translation is not under our
control, is subject to volatility and can obscure underlying business trends.
31
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
As discussed above, the COVID-19 pandemic has adversely impacted our overall
results of operations for the three months ended
Three Months Ended
($ in millions) April 3, 2020 March 29, 2019 $ Variance % Change
Sales $ 547.2 100.0 % $ 659.7 100.0 % (112.5 ) (17.1 )%
Cost of sales 268.8 49.1 % 296.6 45.0 % (27.8 ) (9.4 )%
Gross profit 278.4 50.9 % 363.1 55.0 % (84.7 ) (23.3 )%
Operating costs:
SG&A expenses 268.7 49.1 % 274.9 41.7 % (6.2 ) (2.3 )%
R&D expenses 34.7 6.3 % 43.3 6.6 % (8.6 ) (19.9 )%
Operating (loss) profit (25.0 ) (4.6 )% 44.9 6.8 % (69.9 ) (155.7 )%
Nonoperating income (expense), net
Other income 0.1 - % 0.1 - % - NM
Interest expense, net (3.3 ) (0.6 )% - - % (3.3 ) NM
(Loss) earnings before income taxes (28.2 ) (5.2 )% 45.0 6.8 % (73.2 ) (162.7 )%
Income tax (benefit) expense (11.0 ) (2.0 )% 7.1 1.1 % (18.1 ) (254.9 )%
Net (loss) income $ (17.2 ) (3.1 )% $ 37.9 5.7 % (55.1 ) (145.4 )%
Effective tax rate 39.0 % 15.8 %
SALES
% Change Three
Month Period Ended
April 3, 2020 vs.
Comparable 2019
Period
Total sales growth (GAAP) (17.1 )%
Less the impact of:
Acquisitions (0.2 )%
Discontinued products 0.9 %
Currency exchange rates 1.8 %
Core sales growth (non-GAAP) (14.6 )%
Through the first two months of the quarter, we had core sales growth of mid-single digits, however, as a result of the COVID-19 pandemic, core sales growth for the three months endedApril 3, 2020 , decreased 14.6%, compared to the comparable period of 2019. We estimate that our core sales decreased by approximately 16.0% due to the impact of the COVID-19 pandemic. As a result of the COVID-19 pandemic, there have been widespread temporary closures of dental practices around the world, except to perform emergency procedures, impacting our sales. Geographically, the decrease in core sales growth was primarily due to lower core sales inWestern Europe ,North America andChina during the three months endedApril 3, 2020 as compared to the comparable period of 2019. Core sales in developed markets decreased in the low teens during the three months endedApril 3, 2020 , as compared to the comparable period of 2019, primarily due to declines inWestern Europe andNorth America . Core sales in emerging markets decreased in the low twenties during the three months endedApril 3, 2020 , as compared to the comparable period of 2019, led primarily due to a decline inChina , the first country impacted by COVID-19. Price negatively impacted sales growth by 0.3% on a period-over-period basis in the three months endedApril 3, 2020 and is reflected as a component of core sales growth. 32 --------------------------------------------------------------------------------
COST OF SALES AND GROSS PROFIT
The decrease in cost of sales during the three months endedApril 3, 2020 , as compared to the comparable period in 2019 was primarily due to lower sales as a result of the COVID-19 pandemic and the impact of foreign currency exchange rates. As a result of an expected decrease in overall demand in the second quarter of 2020, we expect that our production facilities will run at less than normal capacity. Accordingly, certain labor and fixed production overhead costs will be expensed as incurred, significantly reducing our gross profit margin. The decrease in gross profit margin during the three months endedApril 3, 2020 , as compared to the comparable period in 2019 was due primarily to lower sales as a result of the COVID-19 pandemic, an unfavorable sales mix and the impact of foreign currency exchange rates.
OPERATING EXPENSES
The increase in SG&A expenses as a percentage of sales for the three months endedApril 3, 2020 , as compared to the comparable period of 2019 was primarily due to lower sales, restructuring and productivity improvement expenses, and incremental public company costs, partially offset by lower sales and marketing spend and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods. The decrease in R&D expenses as a percentage of sales for the three months endedApril 3, 2020 , as compared to the comparable period of 2019 was primarily due to a decrease in spending on product development initiatives, partially offset by lower sales. OPERATING (LOSS) PROFIT
Operating loss margin was 4.6% for the three months ended
• Lower sales primarily due to the impact of the COVID-19 pandemic, an
unfavorable sales mix, higher restructuring and productivity improvement
expenses, incremental corporate costs and the impact of foreign currency
exchange rates, partially offset by lower sales and marketing spend, and
incremental period-over-period savings associated with restructuring and
productivity improvement actions taken in prior periods.
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 nonoperating income (expense), were$0.1 million for both the three months endedApril 3, 2020 andMarch 29, 2019 . INTEREST EXPENSE, NET The increase in interest expense for the three months endedApril 3, 2020 , as compared to the comparable period in 2019, is due to our outstanding debt of$1.5 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. No borrowings existed during the three months endedMarch 29, 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. 33 --------------------------------------------------------------------------------
INCOME TAXES
Our effective tax rate of 39.0% and 15.8% for the three months endedApril 3, 2020 andMarch 29, 2019 , respectively, differ from theU.S. federal statutory rate of 21.0%, primarily due to our geographical mix of taxable earnings, including the impact of COVID-19 in the three months endedApril 3, 2020 . Our effective tax rate of 39.0% for three months endedApril 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 in the three months endedApril 3, 2020 and a reduction in certain discrete tax benefits.
COMPREHENSIVE (LOSS) INCOME
For the three months endedApril 3, 2020 , comprehensive loss was$63 million as compared to comprehensive income of$0.2 million for the comparable period of 2019. The decrease was primarily due to a net loss and unrealized losses related to our interest rate swap derivative contracts.
RESULTS OF OPERATIONS - BUSINESS SEGMENTS
Sales by business segment were as follows ($ in millions):
Three Months Ended
April 3, 2020 March 29, 2019
Specialty Products & Technologies $ 272.6 $ 348.8
Equipment & Consumables 274.6 310.9
Total $ 547.2 $ 659.7
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
($ in millions) April 3, 2020 March 29, 2019
Sales $ 272.6 $ 348.8
Operating profit $ 7.8 $ 66.1
Operating profit as a % of sales 2.9 % 19.0 %
34
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Core Sales Growth
% Change Three
Month Period
Ended April 3,
2020 vs.
Comparable 2019
Period
Total sales growth (GAAP) (21.8 )%
Less the impact of:
Acquisitions (0.4 )%
Discontinued products 1.3 %
Currency exchange rates 1.5 %
Core sales growth (non-GAAP) (19.4 )%
We estimate that our core sales decreased by approximately 22.0% due to the
impact of the COVID-19 pandemic. As a result of the COVID-19 pandemic, there
have been widespread temporary closures of dental practices around the world,
except to perform emergency procedures, impacting our sales. Geographically, the
decrease in core sales growth was primarily due to lower core sales in Western
Europe , North America and China . Core sales decreased for implant systems and
orthodontic products in most of the markets we serve as result of the COVID-19
pandemic. Price in the segment negatively impacted sales growth by 0.5% on a
period-over-period basis in the three months ended April 3, 2020 and is
reflected as a component of core sales growth.
Operating profit margin decreased 1,610 basis points during the three months
ended April 3, 2020 , as compared to the comparable period of 2019. The following
factors impacted period-over-period operating profit margin comparisons:
• Lower sales with an unfavorable sales mix, restructuring and productivity
improvement expenses and the impact of foreign currency exchange rates,
partially offset by lower sales and marketing spend, and incremental
period over period savings associated with restructuring and productivity
improvement actions taken in prior periods.
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
($ in millions) April 3, 2020 March 29, 2019
Sales $ 274.6 $ 310.9
Operating profit $ (19.3 ) $ (12.2 )
Operating profit as a % of sales (7.0 )% (3.9 )%
35
--------------------------------------------------------------------------------
Core Sales Growth
% Change Three
Month Period
Ended April 3,
2020 vs.
Comparable 2019
Period
Total sales growth (GAAP) (11.7 )%
Less the impact of:
Discontinued products 0.4 %
Currency exchange rates 2.1 %
Core sales growth (non-GAAP) (9.2 )%
We estimate that our core sales decreased by approximately 10.0% due to the
impact of the COVID-19 pandemic. As a result of the COVID-19 pandemic, there
have been widespread temporary closures of dental practices around the world,
except to perform emergency procedures, impacting our sales. Geographically, the
decrease in core sales growth was primarily due to lower core sales in Western
Europe , North America and China . Core sales of equipment and traditional
consumables decreased in most of the markets we serve as a result of the
COVID-19 pandemic. Price in the segment was flat on a period-over-period basis
in the three months ended April 3, 2020 and is reflected as a component of core
sales growth.
Operating profit margin decreased 310 basis points during the three months ended
• Lower sales with an unfavorable sales mix, restructuring and productivity
improvement expenses and the impact of foreign currency exchange rates,
partially offset by lower sales and marketing and R&D spend, and
incremental period over period savings associated with restructuring and
productivity improvement actions taken in prior periods.
INFLATION
The effect of inflation on our sales and net (loss) income was not significant
for the three months ended
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 on cash flow from operations, cash on hand and funds available under our Revolving Credit Facility, which was fully drawn down on inMarch 2020 , and 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, we believe that these sources of funds will be adequate to fund debt service requirements and provide cash, as required, to support our strategy, ongoing operations, capital expenditures, lease obligations and working capital for at least the next 12 months. 36
-------------------------------------------------------------------------------- If our cash flows 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:
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