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 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 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, 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, widespread protests and civil unrest, man-made and natural disasters, public health issues and other events, pension plan costs, our ability to attract, develop and retain talented executives and other key employees, and other risks and uncertainties set forth under "Item 1A. Risk Factors" in the 2019 10-K and this Quarterly Report on Form 10-Q. 36 -------------------------------------------------------------------------------- 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 21 to our Condensed Consolidated and Combined Financial Statements. Following the Separation, our Condensed Consolidated Financial Statements include our accounts and our wholly owned subsidiaries and no longer include any allocations of expenses from Danaher to us. Our Condensed Consolidated and Combined Financial Statements may not be indicative of our results had we been a separate stand-alone entity throughout the periods presented, nor are the results stated herein indicative of what our financial position, results of operations and cash flows may be in the future. We have incurred and will continue to incur additional costs as a separate public company. As a separate public company, our total costs related to such support functions may differ from the costs that were historically allocated to us from Danaher. These additional costs are primarily for the following: •additional personnel costs, including salaries, benefits and potential bonuses and/or stock-based compensation awards for staff additions to replace support provided by Danaher that is not covered by the Transition Services Agreement; and •corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs,SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees. Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs. OVERVIEW General We provide products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile. With leading brand names, innovative technology and significant market positions, we are a leading worldwide provider of a broad range of dental implants, orthodontic appliances, general dental consumables, equipment and services, and are dedicated to driving technological innovations that help dental professionals improve clinical outcomes and enhance productivity. Our research and development, manufacturing, sales, distribution, service and administrative facilities are located in more than 30 countries acrossNorth America ,Asia ,Europe , theMiddle East andLatin America . 37 -------------------------------------------------------------------------------- During the three and nine months endedOctober 2, 2020 and year endedDecember 31, 2019 , sales derived from customers outside ofthe United States were 53.7%, 54.9% and 56.0%, 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 increasing shipments of disinfectant products and have further increased our investment to expand capacity.
38 -------------------------------------------------------------------------------- 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.
Our continued investment in Spark, our clear aligner system, has led to increased manufacturing capacity and continues to gain market adoption as orthodontists and their patients see the benefits of the clear, stain resistant and comfortable design.
We obtained regulatory approval of our N1 implant system and made our first sales in June. N1 is now available in eight countries inEurope and we will continue to roll out N1 to customers in the remainder of the year. 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 we believe that we are on track in our efforts to achieve MDR certification for our full portfolio of products.
Results of Operations
In response to COVID-19, many dental associations globally recommended that dental practices delay elective procedures and only perform emergency procedures. As a result, there were widespread temporary closures of dental practices around the world due to the pandemic, except to perform emergency procedures. The majority of dental practices have reopened, however, overall patient volume remains below pre-COVID-19 levels. As dental practices reopened, dental associations have recommended enhanced safety, disinfection and social distancing protocols. These measures may remain in place for a significant period of time in certain regions and are likely to continue to adversely affect our business, results of operations and financial condition. As a result, our sales have been significantly negatively impacted for the nine months endedOctober 2, 2020 , which 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, primarily in the second quarter. 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 operational challenges faced by our customers. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity, or results of operations is uncertain. Because of the dynamic nature of the crisis, we cannot accurately predict the extent or duration of the impacts of the COVID-19 pandemic. 39 --------------------------------------------------------------------------------
Liquidity
In May of 2020, we entered into the Amendment that, among other changes as described in Note 13 to our Condensed Consolidated and Combined Financial Statements, waives the quarterly-tested leverage covenant and reduces the interest coverage ratio through and including the first quarter of 2021. Also in May, we issued the Notes with gross and net proceeds of$517.5 million and$502.6 million , respectively. We believe the Amendment, and the full borrowing capacity of$250.0 million available under the Revolving Credit Facility and the proceeds from the Notes, currently provide us with the appropriate level of flexibility to manage our operations. In future periods, the COVID-19 pandemic and its impact on the capital markets could impact our ability to obtain future financing.
As noted above, we are aligning our cost structure to the realities of the current operating environment. We continue to focus on actions to preserve liquidity by actively managing all discretionary spending. We are also taking additional actions to improve the long-term financial structure of the business.
Furthermore, we plan to continue utilizing certain provisions of the CARES Act enacted by theU.S. Government to provide additional short-term liquidity, including relief from employer payroll tax remittance and employee retention credits. 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$43.7 million . Matricel, a German company, is a provider of biomaterials used in dental applications and is part of our Specialty Products and Technologies segment. For the three and nine months endedOctober 2, 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 positively impacted reported sales by approximately 0.8% for the three months endedOctober 2, 2020 and negatively impacted reported sales by approximately 0.9% for the nine months endedOctober 2, 2020 , compared to the comparable periods of 2019, primarily due to the weakening of theU.S. dollar against most major currencies for the three months endedOctober 2, 2020 and the strengthening of theU.S. dollar against most major currencies for the nine months endedOctober 2, 2020 . 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. 40 --------------------------------------------------------------------------------
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 . Since theUK and EU are still negotiating the nature of their relationship after the transition period, we expect a hard exit as the most likely scenario as ofJanuary 1, 2021 . We continue to monitor the new guidelines and regulations issued by the EU andUK regarding Brexit and we will continue to 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.
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. 41 -------------------------------------------------------------------------------- Core sales growth should be considered in addition to, and not as a replacement for or superior to, sales, and may not be comparable to similarly titled measures reported by other companies. We believe that reporting the non-GAAP financial measure of core sales growth provides useful information to investors by helping identify underlying growth trends in our on-going business and facilitating comparisons of our sales performance with our performance in prior and future periods and to our peers. We also use core sales growth to measure our operating and financial performance. We exclude the effect of acquisitions because the timing, size, number and nature of such transactions can vary significantly from period-to-period and between us and our peers, which we believe may obscure underlying business trends and make comparisons of long-term performance difficult. We exclude sales from discontinued products because discontinued products do not have a continuing contribution to operations and management believes that excluding such items provides investors with a means of evaluating our on-going operations and facilitates comparisons to our peers. We exclude the effect of currency translation from core sales because currency translation is not under our control, is subject to volatility and can obscure underlying business trends. RESULTS OF OPERATIONS
As discussed above, the COVID-19 pandemic has adversely impacted our overall
results of operations for the three and nine months ended
Three Months Ended ($ in millions) October 2, 2020 September 27, 2019 $ Variance % Change Sales$ 640.5 100.0 %$ 659.3 100.0 % (18.8) (2.9) % Cost of sales 299.8 46.8 % 292.3 44.3 % 7.5 2.6 % Gross profit 340.7 53.2 % 367.0 55.7 % (26.3) (7.2) % Operating costs: SG&A expenses 248.8 38.8 %$ 252.0 38.2 % (3.2) (1.3) % R&D expenses 22.5 3.5 % 36.3 5.5 % (13.8) (38.0) % Operating profit 69.4 10.8 % 78.7 11.9 % (9.3) (11.8) % Nonoperating income (expense), net Other income 0.2 - %$ 0.2 - % - NM Interest expense, net (23.4) (3.7) % (0.2) - % (23.2) NM Earnings before income taxes 46.2 7.2 % 78.7 11.9 % (32.5) (41.3) % Income tax expense 10.6 1.7 % 16.6 2.5 % (6.0) (36.1) % Net income$ 35.6 5.6 %$ 62.1 9.4 % (26.5) (42.7) % Effective tax rate 22.9 % 21.1 % Nine Months Ended ($ in millions) October 2, 2020 September 27, 2019 $ Variance % Change Sales$ 1,549.7 100.0 %$ 2,031.1 100.0 % (481.4) (23.7) % Cost of sales 780.1 50.3 % 907.4 44.7 % (127.3) (14.0) % Gross profit 769.6 49.7 % 1,123.7 55.3 % (354.1) (31.5) % Operating costs: SG&A expenses 759.4 49.0 % 804.9 39.6 % (45.5) (5.7) % R&D expenses 73.7 4.8 % 119.3 5.9 % (45.6) (38.2) % Operating (loss) profit (63.5) (4.1) % 199.5 9.8 % (263.0) (131.8) % Nonoperating income (expense), net Other income 0.4 - % 1.6 0.1 % (1.2) NM Interest expense, net (41.2) (2.7) % (0.2) - % (41.0) NM (Loss) earnings before income taxes (104.3) (6.7) % 200.9 9.9 % (305.2) (151.9) % Income tax (benefit) expense (29.2) (1.9) % 39.4 1.9 % (68.6) (174.1) % Net (loss) income$ (75.1) (4.8) %$ 161.5 8.0 % (236.6) (146.5) % Effective tax rate 28.0 % 19.6 % 42
-------------------------------------------------------------------------------- SALES GAAP Reconciliation % Change Three Month % Change Nine Month Period Ended October Period Ended October 2, 2020 vs. Comparable 2, 2020 vs. Comparable 2019 Period 2019 Period Total sales growth (GAAP) (2.9) % (23.7) % Less the impact of: Acquisitions (0.1) % (0.2) % Discontinued products 2.6 % 1.7 % Currency exchange rates (0.8) % 0.9 % Core sales growth (non-GAAP) (1.2) % (21.3) % In response to COVID-19, many dental associations globally recommended that dental practices delay elective procedures and only perform emergency procedures. As a result, there were widespread temporary closures of dental practices around the world due to the pandemic, except to perform emergency procedures. During the three months endedJuly 3, 2020 , dental practices in the markets in which we operate started to reopen and as ofOctober 2, 2020 , the majority of dental practices were open, however, overall patient volume remains below pre-COVID-19 levels. Core sales growth for the three months endedOctober 2, 2020 , decreased 1.2%, compared to the comparable period of 2019. Core sales in developed markets increased during the three months endedOctober 2, 2020 , as compared to the comparable period of 2019, primarily due to an increase inNorth America andWestern Europe . Core sales in emerging markets decreased during the three months endedOctober 2, 2020 , as compared to the comparable period of 2019, primarily due to declines in most major regions, partially offset with an increase in core sales inChina . Core sales growth for the nine months endedOctober 2, 2020 , decreased 21.3%, compared to the comparable period of 2019. Core sales in developed markets decreased during the nine months endedOctober 2, 2020 , as compared to the comparable period of 2019, primarily due to a decline inNorth America andWestern Europe . Core sales in emerging markets decreased during the nine months endedOctober 2, 2020 , as compared to the comparable period of 2019, with core sales declining in most major regions.
COST OF SALES AND GROSS PROFIT
The increase in cost of sales during the three months endedOctober 2, 2020 , as compared to the comparable period in 2019, was primarily due to restructuring costs, an unfavorable sales mix and the impact of foreign currency exchange rates. The decrease in cost of sales during the nine months endedOctober 2, 2020 , as compared to the comparable period in 2019, was primarily due to lower sales as a result of the COVID-19 pandemic, partially offset by an unfavorable sales mix, restructuring costs, excess capacity costs and the impact of foreign currency exchange rates. The decrease in gross profit margin during the three and nine months endedOctober 2, 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, restructuring costs and the impact of foreign currency exchange rates. Gross profit margin for the nine months endedOctober 2, 2020 , was also impacted by higher excess capacity costs as compared to the comparable period in 2019.
OPERATING EXPENSES
The increase in SG&A expenses as a percentage of sales for the three months
ended
43 -------------------------------------------------------------------------------- The increase in SG&A expenses as a percentage of sales for the nine months endedOctober 2, 2020 , as compared to the comparable period of 2019, was primarily due to lower sales, restructuring and productivity improvement expenses, costs for legal matters and incremental public company costs, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods. The decrease in R&D expenses as a percentage of sales for the three and nine months endedOctober 2, 2020 , as compared to the comparable periods of 2019, was primarily due to a decrease in spending on product development initiatives in the Equipment & Consumables segment, partially offset by lower sales.
OPERATING PROFIT (LOSS)
Operating profit margin was 10.8% for the three months endedOctober 2, 2020 , as compared to an operating profit margin of 11.9% for the comparable period of 2019. The decrease in operating profit margin was due to lower sales primarily due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses, incremental public company costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including pay cuts, reduced discretionary spend including sales, marketing and travel, research and development and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods. Operating profit margin was (4.1)% for the nine months endedOctober 2, 2020 , as compared to an operating profit margin of 9.8% for the comparable period of 2019. The decrease in operating profit margin was due to lower sales primarily due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses, incremental public company costs, costs for legal matters and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel, research and development 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$0.2 million for both the three months endedOctober 2, 2020 andSeptember 27, 2019 , and$0.4 million and$1.6 million for the nine months endedOctober 2, 2020 andSeptember 27, 2019 , respectively.
INTEREST EXPENSE, NET
The increase in interest expense for the three and nine months endedOctober 2, 2020 , as compared to the comparable periods in 2019, is due to our outstanding debt balance of$1.8 billion . In addition, sinceMay 2020 , we have incurred higher interest rates on our Term Loans and Revolving Credit Facility as a result of the amended Credit Agreement. In conjunction with the Separation, we entered into the Credit Agreement, the proceeds of which were used to pay Danaher consideration for the transfer of the Dental business to us. In March of 2020, we drew down$250.0 million from our revolving line of credit and repaid it in September of 2020. In May of 2020, we issued the Notes with a principal value of$517.5 million to provide additional liquidity in response to the COVID-19 pandemic. 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. 44 --------------------------------------------------------------------------------
INCOME TAXES
Our effective tax rate of 22.9% and 21.1% for the three months endedOctober 2, 2020 andSeptember 27, 2019 , respectively and 28.0% and 19.6% for the nine months endedOctober 2, 2020 andSeptember 27, 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 and nine months endedOctober 2, 2020 . Our effective tax rate of 22.9% for the three months endedOctober 2, 2020 , was higher compared to the comparable period in 2019 due to a change in our geographical mix of earnings and a reduction in certain discrete tax benefits. Our effective tax rate of 28.0% for the nine months endedOctober 2, 2020 , was higher compared to the comparable period in 2019 due to a change in our geographical mix of earnings primarily due to the impact of the pretax loss as a result of COVID-19 and a reduction in certain discrete tax benefits.
COMPREHENSIVE INCOME (LOSS)
For the three months endedOctober 2, 2020 , comprehensive income was$55.9 million as compared to comprehensive income of$6.6 million for the comparable period of 2019. The increase was primarily due to foreign currency translation gains, partially offset by lower net income. For the nine months endedOctober 2, 2020 , comprehensive loss was$67.1 million as compared to comprehensive income of$98.8 million for the comparable period of 2019. The decrease was primarily due to lower net income, partially offset by foreign currency translation gains.
RESULTS OF OPERATIONS - BUSINESS SEGMENTS
Sales by business segment were as follows ($ in millions):
Three Months Ended Nine Months Ended September 27, September 27, October 2, 2020 2019 October 2, 2020 2019 Specialty Products & Technologies$ 316.9 $
317.8 $ 774.1
323.6 341.5 775.6 1,017.2 Total$ 640.5 $ 659.3 $ 1,549.7 $ 2,031.1
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 September 27, ($ in millions) October 2, 2020 September 27, 2019 October 2, 2020 2019 Sales$ 316.9 $ 317.8$ 774.1 $ 1,013.9 Operating profit $ 43.2 $ 54.6 $ 31.8$ 175.2 Operating profit as a % of sales 13.6 % 17.2 % 4.1 % 17.3 % 45 --------------------------------------------------------------------------------
Core Sales Growth
% Change Three Month % Change Nine Month Period Ended October Period EndedOctober 2, 2020 vs. Comparable 2, 2020 vs. Comparable 2019 Period 2019 Period
Total sales growth (GAAP) (0.3) % (23.7) % Less the impact of: Acquisitions (0.2) % (0.4) % Discontinued products 0.2 % 0.7 % Currency exchange rates (1.0) % 0.7 % Core sales growth (non-GAAP) (1.3) % (22.7) % Core sales growth for the three months endedOctober 2, 2020 decreased 1.3%, compared to the comparable period of 2019. Geographically, the decrease in core sales growth was primarily due to lower core sales inNorth America , theMiddle East andLatin America , partially offset byChina andWestern Europe . Core sales decreased for implant systems and in most of the markets we serve primarily as a result of the COVID-19 pandemic. Core sales for orthodontics increased primarily due to demand for our clear aligner systems and self-ligating brackets. Core sales growth for the nine months endedOctober 2, 2020 decreased 22.7%, compared to the comparable period of 2019. Geographically, the decrease in core sales growth was primarily due to lower core sales inNorth America ,Western Europe andAsia . Core sales decreased for implant systems and orthodontic products in most of the markets we serve primarily as a result of the COVID-19 pandemic. Operating profit margin was 13.6% for the three months endedOctober 2, 2020 , as compared to an operating profit margin of 17.2% for the comparable period of 2019. The decrease in operating profit margin was primarily due to lower sales due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee pay cuts, reduced discretionary spend including sales, marketing and travel and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods. Operating profit margin was 4.1% for the nine months endedOctober 2, 2020 , as compared to an operating profit margin of 17.3% for the comparable period of 2019. The decrease in operating profit margin was primarily due to lower sales primarily due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses, excess capacity costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods.
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 Nine Months Ended September 27, ($ in millions) October 2, 2020 September 27, 2019 October 2, 2020 2019 Sales$ 323.6 $
341.5
$ 45.0 $ 31.1$ (28.1) $ 48.1 Operating profit (loss) as a % of sales 13.9 % 9.1 % (3.6) % 4.7 % 46
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Core Sales Growth % Change Three Month % Change Nine Month Period Ended October Period Ended October 2, 2020 vs. 2, 2020 vs. Comparable 2019 Comparable 2019 Period Period Total sales growth (GAAP) (5.2) % (23.8) % Less the impact of: Discontinued products 4.7 % 2.6 % Currency exchange rates (0.1) % 1.4 % Core sales growth (non-GAAP) (0.6) % (19.8) % Core sales growth for the three months endedOctober 2, 2020 decreased 0.6%, compared to the comparable period of 2019. Geographically, the decrease in core sales growth was primarily due to lower core sales inWestern Europe ,Asia andLatin America , partially offset by an increase inNorth America . Core sales of equipment decreased in most of the markets we serve primarily as a result of the COVID-19 pandemic, partially offset by an increase in core sales of traditional consumables and increased demand for our disinfecting products. Core sales growth for the nine months endedOctober 2, 2020 decreased 19.8%, compared to the comparable period of 2019. Geographically, the decrease in core sales growth was primarily due to lower core sales inNorth America ,Western Europe andAsia . Core sales of equipment and traditional consumables decreased in most of the markets we serve primarily as a result of the COVID-19 pandemic, partially offset by increased demand for our disinfecting products. Operating profit margin was 13.9% for the three months endedOctober 2, 2020 , as compared to an operating profit margin of 9.1% for the comparable period of 2019. The increase in operating profit margin was primarily due to cost reduction initiatives including pay cuts, reduced discretionary spend including sales, marketing and travel, research and development and incremental period-over-period savings associated with restructuring and productivity improvement actions taken in prior periods partially offset by higher restructuring and productivity improvement expenses, an unfavorable sales mix and the impact of foreign currency exchange rates. Operating profit margin was (3.6)% for the nine months endedOctober 2, 2020 , as compared to an operating profit margin of 4.7% for the comparable period of 2019. The decrease in operating profit margin was primarily due to lower sales due to the impact of the COVID-19 pandemic, an unfavorable sales mix, higher restructuring and productivity improvement expenses, excess capacity costs and the impact of foreign currency exchange rates, partially offset by cost reduction initiatives including employee furloughs, pay cuts, reduced discretionary spend including sales, marketing and travel, research and development 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 income (loss) was not significant
for the three and nine 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.
47 -------------------------------------------------------------------------------- We depend on cash flow from operations, cash on hand and funds available under our Revolving Credit Facility. As ofOctober 2, 2020 , there were no borrowings outstanding under the Revolving Credit Facility. InMay 2020 , we received net proceeds of$502.6 million in connection with the Notes that we issued. In the future, we may depend on other debt financings and equity financings to finance our acquisition strategy, working capital needs and capital expenditures. While we expect to experience reduced cash flow from operations as a result of decreased revenues during the current operating environment resulting from the COVID-19 pandemic, we believe that these sources of funds will be 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. 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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