ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations of our business is designed to provide a reader of our financial statements with a narrative from the perspective of management. You should read the following discussion in conjunction with the sections entitled “Envista Holdings Corporation Audited Consolidated Financial Statements” included in this Annual Report on Form 10-K. This section of the Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussion of 2020 items and year-to-year comparisons between 2021 and 2020 are not included in this Form 10-K, and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is divided into six sections:
◦Overview
◦Results of Operations
◦Liquidity and Capital Resources
◦Qualitative and Quantitative Disclosures About Market Risk
◦Critical Accounting Estimates
◦New Accounting Standards
OVERVIEW
General
We provide products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile. We help our customers deliver the best possible patient care through industry-leading solutions, technologies, and services. With leading brand names, innovative technology and significant market positions, we are a leading worldwide provider of a broad range of solutions to support implant-based tooth replacements, orthodontic treatments, digital imaging and diagnostics, as well as general dental consumables, equipment and services, and are dedicated to driving technological innovations that help dental professionals improve clinical outcomes and enhance productivity. Our research and development, manufacturing, sales, distribution, service and administrative facilities are located in more than 30 countries across North America, Asia, Europe, the Middle East and Latin America.
During 2022, 51% of our sales were derived from customers outside the United States. As a global provider of dental consumables, equipment and services, our operations are affected by worldwide, regional and industry-specific economic and political factors. Given the broad range of dental products, software and services provided and geographies served, we do not use any indices other than general economic trends to predict our overall outlook. Our individual businesses monitor key competitors and customers, including to the extent possible their sales, to gauge relative performance and the outlook for the future.
As a result of our geographic and product line diversity, we face a variety of opportunities and challenges, including rapid technological development in most of our served markets, the expansion and evolution of opportunities in emerging markets, trends and costs associated with a global labor force, consolidation of our competitors and increasing regulation. We operate in a highly competitive business environment in most markets, and our long-term growth and profitability will depend in particular on our ability to expand our business in emerging geographies and emerging market segments, identify, consummate and integrate appropriate acquisitions, develop innovative and differentiated new products and services, expand and improve the effectiveness of our sales force, continue to reduce costs and improve operating efficiency and quality and effectively address the demands of an increasingly regulated global environment. We are making significant investments to address the rapid pace of technological change in our served markets and to globalize our manufacturing, research and development and customer-facing resources (particularly in emerging markets and our dental implant business) in order to be responsive to our customers throughout the world and improve the efficiency of our operations.
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Key Trends and Conditions Affecting Our Results of Operations
COVID-19
The extent of the impact of the COVID-19 pandemic on our business remains uncertain and difficult to predict because of the dynamic and evolving nature of the situation. The global impact of the outbreak continues to adversely affect many industries, and different geographies continue to reflect the effects of public health restrictions in various ways. The economic recovery following the impact of the COVID-19 pandemic is only partially underway and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with uncertainty regarding its ultimate length and trajectory. During the year ended December 31, 2022, notwithstanding improvement in many markets in which we operate due to a return to more normalized business operations, certain markets continued to be adversely impacted by COVID-19. In particular, sales decreased in China due to lockdowns early in the year and a subsequent relaxing of restrictions, which resulted in increased infection rates.
Russia-Ukraine Conflict
Russia’s invasion of Ukraine and the global response to this invasion, including sanctions imposed by the U.S. and other countries, could have an adverse impact on our business, including our ability to market and sell products in the affected regions, potentially heightening our risk of cyber security attacks, impacting our ability to enforce our intellectual property rights in Russia, creating disruptions in the global supply chain, and potentially having an adverse impact on the global economy, financial markets, energy markets, currency rates and otherwise. Russia’s invasion of Ukraine did not have a material impact on our financial position or results of operations as of and for the year ended December 31, 2022.
Industry Trends
We operate in the large and growing global dental products industry. We believe growth in the global dental industry will be driven by:
◦an aging population;
◦the current under penetration of dental procedures, especially in emerging markets;
◦improving access to complex procedures due to increasing technological innovation;
◦an increasing demand for cosmetic dentistry; and
◦growth of DSOs, which are expected to drive increasing penetration of, and access to, dental care globally.
Product Development, New Product Launches and Commercial Investment
A key element of our targeted value creation strategy is to drive growth through portfolio development and product innovation. Our future growth and success depend on both our pipeline of new products and technologies, including new products and technologies that we may obtain through license or acquisition, and the expansion of the use of our existing products and technologies. We believe we are a leader in dental research and development (“R&D”), with approximately $287.3 million of R&D expenditures since 2020 and a track record of product innovation, business development and commercialization.
We continue transforming our portfolio by investing in our Implant-Based Tooth Replacement and Orthodontic Solutions businesses and also making investments in emerging markets, critical to our growth strategy. 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 believe that Spark will provide growth opportunities for our Orthodontic Solutions business over the next several years.
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Foreign Exchange Rates
Significant portions of our sales and costs are exposed to changes in foreign exchange rates. During the year ended December 31, 2022, our products were sold in more than 140 countries and 51% of our sales were to customers outside of the United States. We seek to manage our foreign exchange risk, in part, through our operations, including managing same-currency sales in relation to same-currency costs and same-currency assets in relation to same-currency liabilities. As our operations use multiple foreign currencies, including the euro, British pound, Brazilian real, Australian dollar, Japanese yen, Canadian dollar and Chinese yuan, changes in those currencies relative to the U.S. dollar will impact our sales, cost of sales and expenses, and consequently, net income. Exchange rate fluctuations in emerging markets may also directly affect our customers’ ability to buy our products in these geographic markets.
On a year-over-year basis, currency exchange rates negatively impacted reported sales by 3.5% for the year ended December 31, 2022 compared to the comparable period of 2021, primarily due to the strengthening of the U.S. dollar against most major currencies. Any future strengthening of the U.S. dollar against major currencies would adversely impact our sales and results of operations and any weakening of the U.S. dollar against major currencies would positively impact our sales and results of operations.
General Economic Conditions
In addition to industry-specific factors, we, like other businesses, face challenges related to global economic conditions, including rising inflation, increasing interest rates, fluctuating foreign currency exchange rates, slowing economic growth, and continuing supply chain disruptions. Dental costs are largely out-of-pocket for the consumer and thus utilization rates can vary significantly depending on economic growth. While many of our products are considered necessary by patients regardless of the economic environment, certain products and services that support discretionary dental procedures may be more susceptible to changes in economic conditions.
Other countries, as well as some private payors, also control the price of health care products, directly or indirectly, through reimbursement, payment, pricing or coverage limitations, tying reimbursement to outcomes or (in the case of governmental entities) compulsory licensing. For example, China has implemented volume-based procurement policies, a series of centralized reforms instituted in China on both a national and regional basis that has resulted in significant price cuts for medical and dental consumables.
Manufacturing and Supply
To date, COVID-19 has had, and may continue to have, an adverse impact on our supply chains and distribution systems. The increase in consumer demand resulting from the lifting of lockdowns has created significant challenges for supply chains as a result of labor and raw material shortages.
In order to sell our products, we must be able to reliably produce and ship our products in sufficient quantities. Many of our products involve complex manufacturing processes and are produced at one or a limited number of manufacturing sites.
Minor deviations in our manufacturing or logistical processes, unpredictability of a product’s regulatory or commercial success or failure, the lead time necessary to construct highly technical and complex manufacturing sites and shifting customer demand increase the potential for capacity imbalances. For a discussion of risks relating to our manufacturing process, refer to “Item 1A. Risk Factors—Risks Related to Our Business.”
Components of Sales and Costs and Expenses
Sales
Our sales are primarily derived from the sale of dental consumables, equipment and services to third-party distributors and end-users. For additional information regarding our products, including descriptions of our products, refer to “Item 1. Business—Business Segments.”
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Costs and Expenses and Other
Cost of sales consists primarily of cost of materials, facilities and other infrastructure used to manufacture our products and shipping and handling costs attributable to delivering our products to our customers. Also included in cost of sales are productivity improvement and restructuring expenses related to our manufacturing operations.
Selling, general and administrative (“SG&A”) expenses consist of, among other things, the costs of selling, marketing, promotion, advertising and administration (including business technology, facilities, legal, finance, human resources, business development and procurement) and amortization expense for intangible assets that have been acquired through business combinations. Also included in SG&A are productivity improvement and restructuring expenses related to our administrative operations.
R&D expenses consist of project costs specific to new product R&D and product lifecycle management, overhead costs associated with R&D operations, regulatory costs, product registrations and investments that support local market clinical trials for approved indications. We manage overall R&D based on our strategic opportunities and do not disaggregate our R&D expenses by the nature of the expense or by product as we do not use or maintain such information in managing our business.
Nonoperating income (expense) consists of the non-service cost components of net periodic benefit costs (which include interest costs, expected return on plan assets, amortization of prior service cost or credits and actuarial gains and losses) and interest expense, net.
Business Performance
During the year ended December 31, 2022, our sales increased 2.4%, while core sales increased 4.1% as compared to the comparable period of 2021. The impact of foreign currency exchange rates reduced sales in the year ended December 31, 2022, by 3.5% compared to the comparable period of 2021.
Acquisitions and Divestitures
Our growth strategy contemplates future acquisitions and we continually evaluate potential acquisitions that either strategically fit with our existing portfolio or expand our portfolio into new and attractive business areas. Our operations and results can be affected by the rate and extent to which appropriate acquisition opportunities are available, acquired businesses are effectively integrated and anticipated synergies or cost savings are achieved. During the year ended December 31, 2022, we completed two acquisitions.
On April 20, 2022, we completed our acquisition of Carestream Dental’s Intraoral Scanner Business for total consideration of approximately $580.3 million, including contingent consideration of $7.5 million, and subject to certain customary adjustments as provided in the Purchase Agreement. The Intraoral Scanner Business manufactures, markets, sells, commercializes, distributes, services, trains, supports, and maintains operations of intraoral scanners and software, and is part of our Equipment & Consumables segment. We purchased the Intraoral Scanner Business through the acquisition of certain assets and the assumption of certain liabilities as well as the acquisition of all of the equity of certain subsidiaries of Carestream Dental.
On July 5, 2022, we acquired all of the equity of Osteogenics for total consideration of approximately $128.2 million, subject to certain customary adjustments as provided in the Equity Purchase Agreement dated May 17, 2022. Osteogenics develops innovative regenerative solutions for periodontists, oral and maxillofacial surgeons, and clinicians involved in implant dentistry throughout the world, and is part of our Specialty Products & Technologies segment.
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On December 31, 2021, we sold substantially all of the KaVo Treatment Unit and Instrument Business (the “Divestiture”) to planmeca Verwaltungs Gmbh, Germany (“Planmeca”), pursuant to the master sale and purchase agreement (the “Purchase Agreement”) among the Company, Planmeca, and Planmeca Oy, as guarantor. Additionally, on December 30, 2021, we entered into an amendment to the Purchase Agreement (the "Amendment"), providing that the transfer of net assets in Russia, China and Brazil (the "Relevant Jurisdictions") be deferred until the purchaser had formed entities for such transfer of assets in each such Relevant Jurisdiction and the applicable asset transfer agreement could be executed and consummated (each such asset transfer, a "Deferred Local Closing"). Except for the implementation of the Deferred Local Closings and related matters regarding the assets in the Relevant Jurisdictions, the provisions, terms and conditions of the Purchase Agreement were not materially amended by the Amendment. The Amendment did not alter the preliminary purchase price that Planmeca paid to the Company upon the closing of the Divestiture. At December 31, 2021, we recorded a liability of $10.8 million for the proceeds related to the Relevant Jurisdictions. As of December 31, 2022, all three Relevant Jurisdictions have closed and the related liability associated with the proceeds released. In accordance with the terms of the Purchase Agreement, we received total net cash consideration of $386.4 million.
The Divestiture was part of our strategy to structurally improve our long-term margins and represented a strategic shift with a major effect on our operations and financial results as described in Accounting Standards Codification (“ASC“) 205-20. The sale met the criteria to be accounted for as a discontinued operation. Accordingly, we have applied discontinued operations treatment for the Divestiture as required by ASC 205-20. In accordance with ASC 205-20, we reclassified the Divestiture to assets and liabilities held for sale on our Consolidated Balance Sheets and reclassified the financial results of the Divestiture in our Consolidated Statements of Operations for all periods presented. Our Consolidated Statements of Cash Flows include the financial results of the KaVo Treatment Unit and Instrument Business for all periods presented. We also revised our discussion and presentation of operating and financial results to be reflective of our continuing operations as required by ASC 205-20. All segment information and descriptions exclude the KaVo Treatment Unit and Instrument Business.
With the sale of the KaVo Treatment Unit and Instrument business and our two recent acquisitions, we continue to make significant progress toward our long-term goal of re-calibrating our product portfolio to higher growth and higher margin segments. The Divestiture and the acquisitions shifted our revenue mix from approximately 50% each for the Specialty Products & Technology and Equipment & Consumables segments to 62% for the Specialty Products & Technology segment and 38% for the Equipment & Consumables segment. The Specialty Products & Technology segment is a higher growth and higher margin business than the Equipment & Consumables segment. These transactions have allowed us to focus more on higher value and higher margin consumables, imaging, and digital workflow solutions.
Non-GAAP Measures
In order to establish period-to-period comparability, we include the non-GAAP measure of core sales in this report. References to the non-GAAP measure of core sales (also referred to as core revenues or sales/revenues from existing businesses) refer to sales calculated according to GAAP, but excluding:
•sales from acquired businesses;
•sales from discontinued products; and
•the impact of currency translation.
We exclude sales from acquired businesses in order to provide accurate year over year comparisons. Sales from discontinued products includes major brands or major products that we have made the decision to discontinue as part of a portfolio restructuring. Discontinued brands or products consist of those which we (1) are no longer manufacturing, (2) are no longer investing in the research or development of, and (3) expect to discontinue all significant sales of within one year from the decision date to discontinue. The portion of sales attributable to discontinued brands or products is calculated as the net decline of the applicable discontinued brand or product from period-to-period. We exclude sales from discontinued products because discontinued products do not have a continuing contribution to operations and management believes that excluding such items provides investors with a means of evaluating our on-going operations and facilitates comparisons to our peers.
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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.
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 EBS. We believe our deep-rooted commitment to EBS helps drive our market leadership and differentiates us in the dental products industry. EBS encompasses not only lean tools and processes, but also methods for driving growth, innovation and leadership. Within the EBS framework, we pursue a number of ongoing strategic initiatives relating to streamlining business operations, portfolio simplification, reduction of costs, redeployment of resources, customer insight generation, product development and commercialization, efficient sourcing, and improvement in manufacturing and back-office support, all with a focus on continually improving quality, delivery, cost, growth and innovation.
RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated statements of earnings should be read along with our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Unless otherwise indicated, all financial data in this Annual Report on Form 10K refer to continuing operations only. For more information on the consolidated basis of preparation, see Note 1 to our audited consolidated financial statements elsewhere in this Annual Report on Form 10-K.
Years Ended December 31, % Change % Change
Operating costs:
Nonoperating income (expense):
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Non-meaningful percentage change related to year-to-year comparisons are designated as NM.
Business Segments
Sales by business segment were as follows ($ in millions):
For the Years Ended December 31,
GAAP Reconciliation
Sales and Core Sales Growth
Total sales growth (GAAP) 2.4 % 30.1 %
Less the impact of:
Acquisitions (1.8) % — %
Discontinued products — % 0.4 %
Currency exchange rates 3.5 % (1.5) %
Core sales growth (non-GAAP) 4.1 % 29.0 %
Sales and core sales growth for the year ended December 31, 2022 increased 2.4% and 4.1%, respectively, compared to the comparable period in 2021. An increase in sales volume positively impacted sales growth by 2.5% on a period-over-period basis, combined with a price increase of 1.6%. Sales in developed markets increased primarily due to strong growth in Western Europe combined with a modest increase in North America. Sales in emerging markets increased primarily due to continued recovery from the COVID-19 pandemic, partially offset by a decrease in China sales due to localized responses to the pandemic, including lockdowns early in the year and subsequent relaxing of restrictions which resulted in an increase to infection rates.
COST OF SALES AND GROSS PROFIT MARGIN
For the Years Ended December 31,
The increase in cost of sales during the year ended December 31, 2022, as compared to the comparable period in 2021, was primarily due to higher sales and the unfavorable impact of higher costs due to inflation, partially offset by lower restructuring spend.
The increase in gross profit margin during the year ended December 31, 2022, as compared to the comparable period in 2021, was primarily due to an increase in sales volume and price, combined with lower restructuring spend, partially offset by the unfavorable impact from foreign exchange rates and higher costs due to inflation.
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OPERATING EXPENSES
For the Years Ended December 31,
Selling, general and administrative expenses $ 1,055.5 $ 1,019.8 $ 924.6
Research and development expenses $ 100.1 $ 100.5 $ 86.7
R&D as a % of sales 3.9 % 4.0 % 4.5 %
The increase in SG&A expenses as a percentage of sales for the year ended December 31, 2022 as compared to the comparable period of 2021, was primarily due to higher sales and marketing expenses, increased amortization of intangible assets and acquisition related costs, partially offset by higher sales volume.
R&D expenses as a percentage of sales for the year ended December 31, 2022, was consistent with the comparable period in 2021.
OTHER INCOME (EXPENSE), NET
Included in other income (expense) for the years ended December 31, 2022 and 2021 were $3.1 million and $2.6 million, respectively of other income (expense) components of net periodic benefit costs.
INTEREST COSTS AND FINANCING
Interest costs were $38.4 million and $54.1 million for the years ended December 31, 2022 and 2021, respectively. The decrease in interest expense for the year ended December 31, 2022 as compared to the comparable period of 2021 was primarily due to the absence of accretive interest expense related to the convertible debt discount as a result of adopting ASU 2020-06 and overall lower debt outstanding, partially offset by higher interest rates.
For a discussion of our outstanding indebtedness, refer to Note 16 to our audited consolidated financial statements elsewhere in this Annual Report on Form 10-K.
INCOME TAXES
For the Years Ended December 31,
Our effective tax rate for the year ended December 31, 2022 was 16.2% compared to (3.5)% in 2021. The change in the effective rate was primarily due to the Company’s geographical mix of earnings and certain Swiss discrete tax benefits in 2021 not recurring in 2022.
SPECIALTY PRODUCTS & TECHNOLOGIES
Our Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, including regenerative products, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products.
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Specialty Products & Technologies Selected Financial Data
For the Years Ended December 31,
Operating profit as a % of sales 16.8 % 18.1 % 5.9 %
Depreciation as a % of sales 1.3 % 1.6 % 1.8 %
Amortization as a % of sales 3.8 % 4.0 % 5.4 %
GAAP Reconciliation
Sales and Core Sales Growth
Total sales growth (GAAP) 6.0 % 34.9 %
Less the impact of:
Acquisitions (1.1) % — %
Discontinued products — % (0.1) %
Currency exchange rates 4.2 % (1.8) %
Core sales growth (non-GAAP) 9.1 % 33.0 %
Sales
Sales and core sales growth for the year ended December 31, 2022 increased 6.0% and 9.1%%, respectively, compared to the comparable period in 2021. Sales growth increased by 8.4% due to higher volume as demand improved for implant systems and orthodontic products, combined with an increase in sales price which impacted sales growth by 0.7% on a period-over-period basis.
Sales in developed markets, for the year ended December 31, 2022, increased primarily due to an increase in North America, Western Europe, Eastern Europe and as well as sales in emerging markets, primarily due to reduced impact of COVID-19 measures. Additionally, sales for the year ended December 31, 2022 were also positively impacted by the acquisition of Osteogenics.
Operating Profit
Operating profit margin was 16.8% for the year ended December 31, 2022, as compared to an operating profit margin of 18.1% for the comparable period of 2021. The decrease in operating profit margin for the year ended December 31, 2022, was primarily due to unfavorable product mix as well as investments in our long-term growth initiatives, including higher sales and marketing expenses and the impact of inflation. The costs were partially offset by higher sales volume and price.
EQUIPMENT & CONSUMABLES
Our Equipment & Consumables segment develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; endodontic systems and related consumables; restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
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Equipment & Consumables Selected Financial Data
For the Year Ended December 31,
Operating profit as a % of sales 17.8 % 15.4 % 6.6 %
Depreciation as a % of sales 0.9 % 1.0 % 1.4 %
Amortization as a % of sales 4.7 % 2.1 % 3.4 %
GAAP Reconciliation
Sales and Core Sales Growth
Total sales growth (GAAP) (3.1) % 23.3 %
Less the impact of:
Acquisitions (2.8) % 1.0 %
Currency exchange rates 2.5 % (0.9) %
Core sales growth (non-GAAP) (3.4) % 23.4 %
Sales
Sales and core sales growth for the year ended December 31, 2022 decreased 3.1% and 3.4%, respectively, compared to the comparable period in 2021. Price positively impacted sales growth by 2.9% on a period-over-period basis, while sales decreased by 6.3% due to lower demand for our imaging products and infection prevention products, offset by increased demand in our restorative and endodontic solutions.
Sales in developed markets, for the year ended December 31, 2022, decreased primarily due to a decrease in North America and Western Europe combined with the decrease in sales in China and other emerging markets. Sales for the year ended December 31, 2022 were positively impacted by the acquisition of the Intraoral Scanner Business.
Operating Profit
Operating profit margin was 17.8% for the year ended December 31, 2022, as compared to an operating profit margin of 15.4% for the comparable period of 2021. The increase in operating profit margin was primarily due to higher sales price, favorable product mix, and lower restructuring costs, partially offset by lower sales volume, increased amortization of intangibles, and an unfavorable incremental material price costs due in part to inflation.
LIQUIDITY AND CAPITAL RESOURCES
We assess our liquidity in terms of our ability to generate cash to fund our operating and investing activities. We continue to generate substantial cash from operating activities and believe that our operating cash flow and other sources of liquidity are sufficient to allow us to manage our capital structure on a short-term and long-term basis and continue investing in existing businesses and consummating strategic acquisitions.
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Following is an overview of our cash flows and liquidity, which includes the cash flows of the KaVo Treatment Unit and Instrument Business for all periods presented:
Overview of Cash Flows and Liquidity
Year Ended December 31,
Net cash provided by operating activities $ 182.7 $ 361.6 $ 283.9
Acquisitions, net of cash acquired $ (696.2) $ (2.1) $ (40.7)
Payments for additions to property, plant and equipment (75.7) (54.7) (47.7)
Proceeds from sales of property, plant and equipment 3.3 11.6 5.3
Proceeds from sale of KaVo Treatment Unit and Instrument Business 73.9 312.5 —
Proceeds from the settlement of derivative financial instruments 56.0 11.4 14.0
All other investing activities (18.6) (16.0) —
Net cash (used in) provided by investing activities $ (657.3) $ 262.7 $ (69.1)
Proceeds from revolving line of credit $ 124.0 $ — $ 249.8
Repayment of revolving line of credit (124.0) — (250.0)
Proceeds from borrowing 0.3 — —
Repayments of borrowing (0.5) (475.7) —
Proceeds from issuance of convertible senior notes — — 517.5
Payment of debt issuance and other deferred financing costs — (2.3) (17.2)
Proceeds from stock option exercises 21.8 19.5 13.8
All other financing activities — 0.1 4.3
Net cash provided by (used in) financing activities $ 12.5 $ (465.6) $ 492.5
Operating Activities
Cash flows from operating activities can fluctuate significantly from period-to-period due to working capital needs and the timing of payments for income taxes, restructuring activities, pension funding and other items impacting cash flows.
Net cash provided by operating activities was $182.7 million during the year ended December 31, 2022 and $361.6 million in 2021. The decrease was primarily due to lower net income, higher incentive compensation payout, transaction costs associated with acquisitions and timing of tax payments.
Investing Activities
Cash flows relating to investing activities consist primarily of cash used for capital expenditures and acquisitions. Capital expenditures are made primarily for increasing capacity, replacing equipment, supporting new product development and improving information technology systems.
Net cash used in investing activities was $657.3 million during the year ended December 31, 2022, as compared to $262.7 million provided by investing activities for the comparable period in 2021. This increase in cash used in investing activities during 2022 was primarily due to the acquisitions of Osteogenics and the Intraoral Scanner Business, and higher purchase of property, plant and equipment, partially offset by proceeds from the sale of the Kavo Treatment Unit and Instruments Business and the settlement of derivative financial instruments.
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Financing Activities and Indebtedness
Net cash provided by financing activities was $12.5 million during the year ended December 31, 2022, compared to $465.6 million used in financing activities for the comparable period of 2021. The increase in cash provided by financing activities during 2022 was due to our repayment of $472.0 million of the Euro Term Loan Facility in February 2021 in connection with an amendment to the Credit Agreement.
For a description of our outstanding debt as of December 31, 2022 and the senior credit facilities, refer to Note 16 to our audited consolidated financial statements in this Annual Report on Form 10-K.
We intend to satisfy any short-term liquidity needs that are not met through operating cash flow and available cash primarily through our revolving credit facility.
As of December 31, 2022, we had no borrowings outstanding under the revolving credit facility and we had the ability to incur an additional $750 million of indebtedness in direct borrowings under the revolving credit facility. As of December 31, 2022, we were in compliance with all of our debt covenants.
Cash and Cash Requirements
As of December 31, 2022, $606.9 million of cash and cash equivalents were held on deposit with financial institutions. Of this amount, $92.7 million was held within the United States and $514.2 million was held outside of the United States. We will continue to have cash requirements to support working capital needs, capital expenditures and acquisitions, pay interest and service debt, pay taxes and any related interest or penalties and fund our restructuring activities as required and support other business needs. We generally intend to use available cash and internally generated funds to meet these cash requirements, but in the event that additional liquidity is required, particularly in connection with acquisitions, we may need to enter into new credit facilities or access the capital markets. We may also access the capital markets from time to time to take advantage of favorable interest rate environments or other market conditions. However, there is no guarantee that we will be able to obtain alternative sources of financing on commercially reasonable terms or at all. See “Item 1A. Risk Factors—Risks Related to Our Business.”
While repatriation of some cash held outside the United States may be restricted by local laws, most of our foreign cash could be repatriated to the United States. Following enactment of the Tax Cut and Jobs Act of 2017 (“TCJA”) and the associated transition tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax; however, repatriation of cash could subject us to non-U.S. jurisdictional taxes on distributions. The cash that our non-U.S. subsidiaries hold for indefinite reinvestment is generally used to finance foreign operations and investments, including acquisitions. The income taxes, if any, applicable to such earnings including basis differences in our foreign subsidiaries are not readily determinable.
As of February 10, 2023, we believe that we have sufficient sources of liquidity to satisfy our cash needs over the next 12 months and beyond, including our cash needs in the United States.
Purchase Obligations
The Company’s purchase obligations primarily consist of agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction.
The following table sets forth, by period due or year of expected expiration, as applicable, a summary of purchase obligations as of December 31, 2022,
Amount of Commitment Expiration per Period
($ in millions) Total Less Than One Year 1-3 Years 4-5 Years More Than 5 Years
For a description of our remaining contractual obligations, such as debt and leases see “Item 8. Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 16 - Debt and Credit Facilities” and “-Note 8 - Leases.”
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Off-Balance Sheet Arrangements
Guarantees and Related Instruments
The following table sets forth, by period due or year of expected expiration, as applicable, a summary of our off-balance sheet commitments as of December 31, 2022.
Amount of Commitment Expiration per Period
($ in millions) Total Less Than One Year 1-3 Years 4-5 Years More Than 5 Years
Guarantees and related instruments $19.0 $14.5 $3.4 $0.4 $0.7
Guarantees consist primarily of outstanding standby letters of credit and bank guarantees. These guarantees have been provided in connection with certain arrangements with vendors, customers, financing counterparties and governmental entities to secure our obligations and/or performance requirements related to specific transactions.
Other Off-Balance Sheet Arrangements
In the normal course of business, we periodically enter into agreements that require us to indemnify customers, suppliers or other business partners for specific risks, such as claims for injury or property damage arising out of our products or services or claims alleging that our products or services infringe third-party intellectual property. We have not included any such indemnification provisions in the contractual obligations table above. Historically, we have not experienced significant losses on these types of indemnification obligations.
Debt Financing Transactions
Credit Agreement
On September 20, 2019, we entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks under which we borrowed approximately $1.3 billion, consisting of the three-year $650.0 million senior term loan facility and the three-year €600.0 million senior euro term loan facility (collectively the “Term Loans”). The Credit Agreement also included the five-year, $250.0 million revolving credit facility.
On February 9, 2021, in connection with an amendment to the Credit Agreement, we repaid $472.0 million of our senior euro term loan facility.
On June 15, 2021, we entered into an amended and restated credit agreement (the “Amended Credit Agreement”) with a syndicate of banks, The Amended Credit Agreement amends and restates our Credit Agreement, originally dated September 20, 2019 (as amended by Amendment No. 1 to Credit Agreement dated as of May 6, 2020, Amendment No. 2 to Credit Agreement dated as of May 19, 2020, and Amendment No. 3 to Credit Agreement dated as of February 9, 2021).
Under the Amended Credit Agreement: (a) the maturity date of our existing Term Loans has been extended to September 20, 2024, (b) the revolving credit facility has been increased from $250.0 million to $750.0 million, (c) we may request further increases to the revolving credit facility in an aggregate amount not to exceed $350.0 million, (d) the amount of cash and cash equivalents permitted to be netted in the definition of “Consolidated Funded Indebtedness” has been increased to up to the greater of (i) $250.0 million and (ii) 50% of Consolidated EBITDA as of the most recent measurement period, and (e) the floor on Eurocurrency rate loans applicable to the revolving credit facility and the senior term loan has been reduced to zero, in each case subject to and in accordance with the terms and conditions of the Amended Credit Agreement. We paid fees aggregating approximately $2.1 million in connection with the Amended Credit Agreement.
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Convertible Senior Notes (the “Notes”)
On May 21, 2020, we issued the Notes due on June 1, 2025, unless earlier repurchased, redeemed or converted. The aggregate principal amount, which includes the initial purchasers’ exercise in full of their option to purchase an additional $68 million principal amount of the Notes, was $517.5 million. The net proceeds from the issuance, after deducting purchasers’ discounts and estimated offering expenses, were $502.6 million. The Notes accrue interest at a rate of 2.375% per annum, payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2020. The Notes have an initial conversion rate of 47.5862 shares of our common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $21.01 per share of our common stock and is subject to adjustment upon the occurrence of specified events. The Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture governing the Notes).
Capped Call Transactions
In connection with the offering of the Notes, we entered into the Capped Calls with certain counterparties. The Capped Calls each have an initial strike price of approximately $21.01 per share, subject to certain adjustments, which corresponds to the initial conversion price of the Notes. The Capped Calls have initial cap prices of $23.79 per share, subject to certain adjustments. The Capped Calls cover, subject to anti-dilution adjustments, 2.9 million shares of the Company's common stock. The Capped Calls are generally intended to reduce or offset the potential dilution from shares of common stock issued upon any conversion of the Notes with such reduction or offset, as the case may be, subject to a cap based on the cap price. The cost of $20.7 million incurred in connection with the Capped Calls was recorded as a reduction to additional paid-in capital.
Legal Proceedings
Please refer to Note 15 to our audited consolidated financial statements included in this Annual Report for information regarding legal proceedings and contingencies, and for a discussion of risks related to legal proceedings and contingencies, please refer to “Item 1A. Risk Factors—General Risks.”
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in foreign currency exchange rates and commodity prices as well as credit risk, each of which could impact our consolidated financial statements. We generally address our exposure to these risks through our normal operating activities. Please refer to Note 2 to our audited consolidated financial statements included in this Annual Report for information regarding derivative financial instruments and discussion of exposures to foreign currency and foreign currency-denominated debt.
Interest Rate Risk
Certain of our borrowings are at variable rates of interest, which may expose us to interest rate risk. We have a $650 million senior term loan facility and a €208 million senior euro term loan facility. To manage our interest rate risk, we entered into an interest rate swap agreement during 2022, which matured in September 2022, to convert a portion of the senior term loan variable rate borrowing into a fixed rate borrowing. A 100 basis point increase in the interest rate related to the senior term loan and the senior euro term loan would have increased our interest expense by $7.0 million for 2022.
Currency Exchange Rate Risk
We face transactional exchange rate risk from transactions with customers in countries outside the United States and from intercompany transactions between affiliates. Transactional exchange rate risk arises from the purchase and sale of goods and services in currencies other than our functional currency or the functional currency of our applicable subsidiary. We also face translational exchange rate risk related to the translation of financial statements of our foreign operations into U.S. dollars, our functional currency. Costs incurred and sales recorded by subsidiaries operating outside of the United States are translated into U.S. dollars using exchange rates effective during the respective period. As a result, we are exposed to movements in the exchange rates of various currencies against the U.S. dollar. In particular, we have more sales in European currencies than we have expenses in those currencies. Therefore, when European currencies strengthen or weaken against the U.S. dollar, operating profits are increased or decreased, respectively. The effect of a change in currency exchange rates on our net investment in international subsidiaries is reflected in the accumulated other comprehensive loss component of equity.
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We have generally accepted the exposure to exchange rate movements without using derivative financial instruments to manage this risk. Both positive and negative movements in currency exchange rates against the U.S. dollar will therefore continue to affect the reported amount of sales and net earnings in our consolidated financial statements. In addition, we have assets and liabilities held in foreign currencies. A 10% depreciation in major currencies relative to the U.S. dollar as of December 31, 2022 would have reduced equity by approximately $248 million.
Credit Risk
We are exposed to potential credit losses in the event of nonperformance by counterparties to our financial instruments. Financial instruments that potentially subject us to credit risk primarily consist of receivables from customers. For additional information on our credit risk from customers, please refer to “Item 1. Business.”
Our businesses perform credit evaluations of our customers’ financial conditions as appropriate and also obtain collateral or other security when appropriate.
Commodity Price Risk
For a discussion of risks relating to commodity prices, refer to “Item 1A. Risk Factors—Risks Related to Our Business.”
CRITICAL ACCOUNTING ESTIMATES
Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience, the current economic environment and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates and judgments.
We believe the following accounting estimates are most critical to an understanding of our financial statements. Estimates are considered to be critical if they meet both of the following criteria: (1) the estimate requires assumptions about material matters that are uncertain at the time the estimate is made, and (2) material changes in the estimate are reasonably likely from period-to-period. For a detailed discussion on the application of these and other accounting estimates, refer to Note 2 to our audited consolidated financial statements.
Business Combinations – Purchase-Price Allocation
Our growth strategy contemplates future acquisitions that either strategically fit with our existing portfolio or expand our portfolio. As a result, accounting for such business combinations requires the allocation of purchase price to the various assets and liabilities of the acquired business at their respective fair values. We use all available information to make these fair value determinations. Determining the fair value of assets acquired requires judgement and assumptions regarding future projection of sales and operating margin, including discount rates.
Acquired Intangibles
Our business acquisitions typically result in the recognition of goodwill, patents, technology, customer relationships and other intangible assets, which affect the amount of future period amortization expense and possible impairment charges that we may incur. Refer to Notes 2, 3 and 9 to our audited consolidated financial statements for a description of our policies relating to acquisitions, goodwill and acquired intangibles.
On the first business day of the fourth quarter of 2022, we performed our annual goodwill impairment test. We first assessed qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or performed a quantitative impairment test. When tested quantitatively, the estimated fair value of reporting units was determined using a combination of techniques, including an income approach and a market-based approach. The discounted cash flow model (i.e., an income approach) requires judgments and assumptions about projected sales growth, future operating margins, discount rates and terminal values. In evaluating the estimates derived by the market-based approach, management makes judgments about the relevance and reliability of the multiples by considering factors unique to our reporting units, including operating results, business plans, economic projections, anticipated future cash flows, business trends and our market capitalization. There are inherent uncertainties related to these assumptions and our judgment in applying them to the analysis of goodwill impairment. Our analysis indicated that the fair values of our reporting units exceeded their carrying values and consequently did not result in an impairment charge.
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We review identified intangible assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. We also test intangible assets with indefinite lives at least annually for impairment. Determining whether an impairment loss occurred requires a comparison of the carrying amount to the sum of discounted cash flows expected to be generated by the asset. These analyses require us to make judgments and estimates about future sales, expenses, market conditions and discount rates related to these assets.
If actual results are not consistent with our estimates and assumptions, goodwill and other intangible assets may be overstated and a charge would need to be taken against net income which would adversely affect our consolidated financial statements.
Contingent Liabilities
As discussed in Note 15 to our audited consolidated financial statements, we are, from time to time, subject to a variety of litigation and similar contingent liabilities incidental to our business (or the business operations of previously owned entities). We recognize a liability for any contingency that is known or probable of occurrence and reasonably estimable. These assessments require judgments concerning matters such as litigation developments and outcomes, the anticipated outcome of negotiations, the number of future claims and the cost of both pending and future claims. In addition, because most contingencies are resolved over long periods of time, liabilities may change in the future due to various factors, including those discussed in Note 15 to our audited consolidated financial statements. If the reserves we established with respect to these contingent liabilities are inadequate, we would be required to incur an expense equal to the amount of the loss incurred in excess of the reserves, which would adversely affect our financial statements.
Pension Plans
For a description of our pension accounting practices, refer to Note 13 to our audited consolidated financial statements. Calculations of the amount of pension costs and obligations depend on the assumptions used in the actuarial valuations, including assumptions regarding discount rates, expected return on plan assets, rates of salary increases, health care cost trend rates, mortality rates and other factors. If the assumptions used in calculating pension costs and obligations are incorrect or if the factors underlying the assumptions change (as a result of differences in actual experience, changes in key economic indicators or other factors) our financial statements could be materially affected. A 50 basis point reduction in the discount rates used for the plans for 2022 would have increased the net obligation by $6.2 million ($4.8 million on an after-tax basis) from the amounts recorded in the financial statements as of December 31, 2022. A 50 basis point increase in the discount rates used for the plans for 2022 would have decreased the net obligation by $5.4 million ($4.2 million on an after-tax basis) from the amounts recorded in the financial statements as of December 31, 2022.
The plan assets consist of various insurance contracts, equity and debt securities as determined by the administrator of each plan. The estimated long-term rate of return ranged from 3.50% to 4.10%. A 50 basis points decrease in the expected long-term rate of return on plan assets for 2023 would result in an increase of $0.4 million in pension expense for the plans for 2023.
Income Taxes
For a description of our income tax accounting policies, refer to Note 21 to our audited consolidated financial statements. We establish valuation allowances for our deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized. This requires us to make judgments and estimates regarding: (1) the ability under tax law to carry back losses, (2) timing and amount of the reversal of taxable temporary differences, (3) expected future taxable income of the appropriate character, and (4) the impact of prudent and feasible tax planning strategies that the Company would implement to prevent an otherwise expiring tax attribute to be unutilized. Future changes to enacted tax rates would also impact the amounts of deferred tax assets and liabilities and could have an adverse impact on our financial statements.
We provide for unrecognized tax benefits when, based upon the technical merits, it is “more likely than not” that an uncertain tax position will not be sustained upon examination. Judgment is required in evaluating tax positions and determining income tax provisions. We re-evaluate the technical merits of our tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (1) a tax audit is completed; (2) applicable tax laws change, including a tax case ruling or legislative guidance; or (3) the applicable statute of limitations expires.
An increase of 1.0% in our 2022 nominal tax rate would have resulted in additional income tax expense for the year ended December 31, 2022 of $2.8 million.
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On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on our current analysis of the provisions, we do not believe this legislation will have a material impact on our financial statements.
NEW ACCOUNTING STANDARDS
For a discussion of the new accounting standards impacting us, refer to Note 2 to our audited consolidated financial statements in this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
Page
Envista Holdings Corporation Audited Annual Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42) 71
Consolidated Balance Sheets as of December 31, 2022 and 2021 74
Notes to Consolidated Financial Statements 80
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Report of Management on Envista Holdings Corporation’s Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework” (2013 framework). Based on this assessment, management concluded that, as of December 31, 2022, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report dated February 16, 2023 appears on page 73 of this
Form 10-K.
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Envista Holdings Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Envista Holdings Corporation (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, the related notes, and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 2023 expressed an unqualified opinion thereon.
Adoption of ASU No. 2020-06
As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for convertible instruments in 2022 due to the adoption of ASU 2020-06 Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Goodwill Impairment
Business Combinations
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2018.
Irvine, California
February 16, 2023
72
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Envista Holdings Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Envista Holdings Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Envista Holdings Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2022, the related notes, and financial statement schedule listed in the Index at Item 15(a) and our report dated February 16, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Envista Holdings Corporation’s Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Irvine, California
February 16, 2023
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ENVISTA HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in millions, except share amounts)
As of December 31,
ASSETS
Current assets:
Prepaid expenses and other current assets 123.4 154.3
Assets held for sale — 12.2
Property, plant and equipment, net 293.6 264.1
Operating lease right-of-use assets 131.8 128.1
LIABILITIES AND EQUITY
Current liabilities:
Accrued expenses and other liabilities 471.4 562.3
Operating lease liabilities 27.0 23.7
Liabilities held for sale — 4.0
Commitments and contingencies
Stockholders’ equity:
Accumulated other comprehensive loss (225.1) (143.5)
Noncontrolling interests — 0.4
Total liabilities and stockholders’ equity $ 6,587.0 $ 6,574.2
See the accompanying Notes to the Consolidated Financial Statements.
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ENVISTA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
($ and shares in millions, except per share amounts)
Year Ended December 31,
Operating expenses:
Nonoperating income (expense):
Other income (expense) 3.1 2.4 (1.0)
Income tax expense (benefit) 45.9 (9.0) (62.5)
Income from continuing operations, net of tax 238.0 263.5 42.5
Income (loss) from discontinued operations, net of tax (Note 4) 5.1 77.0 (9.2)
Earnings per share:
Earnings from continuing operations - basic $ 1.46 $ 1.63 $ 0.27
Earnings from continuing operations - diluted $ 1.34 $ 1.48 $ 0.26
Earnings (loss) from discontinued operations - basic $ 0.03 $ 0.48 $ (0.06)
Earnings (loss)from discontinued operations - diluted $ 0.03 $ 0.43 $ (0.06)
Average common stock and common equivalent shares outstanding:
See the accompanying Notes to the Consolidated Financial Statements.
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ENVISTA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in millions)
Year Ended December 31,
Other comprehensive (loss) income, net of income taxes:
Foreign currency translation adjustments (100.9) (77.1) 53.9
Cash flow hedge adjustments 1.7 4.6 (6.4)
Total other comprehensive (loss) income, net of income taxes (81.6) (51.7) 52.4
See the accompanying Notes to the Consolidated Financial Statements.
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ENVISTA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in millions)
Common stock-based award activity — 32.2 — — 32.2 —
Separation related adjustments — 0.3 — — 0.3 —
Other comprehensive income — — — 52.4 52.4 —
Changes in noncontrolling interests — — — — — (2.2)
Common stock-based award activity — 41.4 — — 41.4 —
Separation related adjustments — 6.8 — — 6.8 —
Other comprehensive loss — — — (51.7) (51.7) —
Change in noncontrolling interest — — — — — (0.4)
Common stock-based award activity — 44.2 — — 44.2 —
Other comprehensive loss — — — (81.6) (81.6) —
See the accompanying Notes to the Consolidated Financial Statements.
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ENVISTA HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
Year Ended December 31,
Cash flows from operating activities:
Noncash items:
Allowance for credit losses 4.8 5.6 23.0
Stock-based compensation expense 30.5 28.2 22.6
Gain on sale of property, plant and equipment (1.9) (2.2) —
Gain on sale of KaVo treatment unit and instrument business (8.9) (11.7) —
Fair value adjustment of acquisition-related inventory 9.5 — —
Amortization of right-of-use assets 24.3 28.3 30.5
Amortization of debt discount and issuance costs 4.1 23.3 13.4
Change in deferred income taxes (29.0) (59.0) (91.4)
Change in trade accounts receivable (71.0) (43.2) 71.9
Change in trade accounts payable 44.5 (20.3) 21.6
Change in prepaid expenses and other assets (11.7) (11.5) (2.5)
Change in accrued expenses and other liabilities (133.0) 34.3 10.0
Change in operating lease liabilities (31.6) (37.5) (36.7)
Cash flows from investing activities:
Acquisitions, net of cash acquired (696.2) (2.1) (40.7)
Payments for additions to property, plant and equipment (75.7) (54.7) (47.7)
Proceeds from sales of property, plant and equipment 3.3 11.6 5.3
Proceeds from the settlement of derivative financial instruments 56.0 11.4 14.0
All other investing activities, net (18.6) (16.0) —
Net cash (used in) provided by investing activities (657.3) 262.7 (69.1)
Cash flows from financing activities:
Proceeds from revolving line of credit 124.0 — 249.8
Repayment of revolving line of credit (124.0) — (250.0)
Proceeds from borrowing 0.3 — —
Repayment of borrowing (0.5) (475.7) —
Proceeds from issuance of convertible senior notes — — 517.5
Payment of debt issuance and other deferred financing costs — (2.3) (17.2)
Proceeds from stock option exercises 21.8 19.5 13.8
All other financing activities — 0.1 4.3
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Net cash provided by (used in) financing activities 12.5 (465.6) 492.5
Effect of exchange rate changes on cash and cash equivalents (4.6) 26.0 (29.6)
Beginning balance of cash and cash equivalents 1,073.6 888.9 211.2
Ending balance of cash and cash equivalents $ 606.9 $ 1,073.6 $ 888.9
Supplemental data:
See the accompanying Notes to the Consolidated Financial Statements.
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ENVISTA HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BUSINESS AND BASIS OF PRESENTATION
Business Overview
The Company provides products that are used to diagnose, treat and prevent disease and ailments of the teeth, gums and supporting bone, as well as to improve the aesthetics of the human smile. The Company is a worldwide provider of a broad range of dental implants, orthodontic appliances, general dental consumables, equipment and services and is dedicated to driving technological innovations that help dental professionals improve clinical outcomes and enhance productivity.
The Company was formed in 2018, as a wholly-owned subsidiary of Danaher Corporation (“Danaher”), to serve as the ultimate parent company of the dental platform of Danaher. On September 20, 2019, the Company completed its initial public offering and on December 18, 2019, Danaher completed the disposition of its ownership interest in the Company referred to herein as the “Separation”.
The Company operates in two business segments: Specialty Products & Technologies and Equipment & Consumables.
The Company’s Specialty Products & Technologies segment develops, manufactures and markets dental implant systems, including regenerative solutions, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products. The Company’s Equipment & Consumables segment develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; endodontic systems and related consumables; and restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").
As discussed in Note 4, Discontinued Operations, on December 31, 2021, the Company sold its KaVo dental treatment unit and instrument business (the "KaVo Treatment Unit and Instrument Business"), which was part of the Company’s Equipment and Consumables segment. The previously reported amounts for the KaVo Treatment Unit and Instrument Business have been reclassified to discontinued operations for all periods presented. All segment information and descriptions exclude the KaVo Treatment Unit and Instrument Business.
Risks and Uncertainties
The Company is subject to risks and uncertainties as a result of the novel coronavirus (“COVID-19”) pandemic.
The extent of the impact of the COVID-19 pandemic on the Company remains uncertain and difficult to predict because of the dynamic and evolving nature of the situation. The global impact of the outbreak continues to adversely affect many industries, and different geographies continue to reflect the effects of public health restrictions in various ways. The economic recovery following the impact of the COVID-19 pandemic is only partially underway and has been gradual, uneven and characterized by meaningful dispersion across sectors and regions with uncertainty regarding its ultimate length and trajectory. During the year ended December 31, 2022, notwithstanding improvement in many markets in which the Company operates due to a return to more normalized business operations, certain markets continued to be adversely impacted by COVID-19. In particular, sales decreased in China due to lockdowns early in the year and a subsequent relaxing of restrictions, which resulted in increased infection rates.
In addition, Russia’s invasion of Ukraine and the global response to this invasion, including sanctions imposed by the U.S. and other countries, could have an adverse impact on the Company’s business, including impacting the Company’s ability to market and sell products in the affected regions, potentially heightening our risk of cyber security attacks, impacting its ability to enforce its intellectual property rights in Russia, creating disruptions in the global supply chain, and by potentially having an adverse impact on the global economy, financial markets, energy markets, currency rates and otherwise.
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NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. The Consolidated Financial Statements also reflect the impact of noncontrolling interests. Noncontrolling interests do not have a significant impact on the Company’s consolidated results of operations, therefore income attributable to noncontrolling interests are not presented separately in the Company’s Consolidated Statements of Operations. Income attributable to noncontrolling interests have been reflected in selling, general and administrative expenses and were insignificant in all periods presented. Reclassifications of certain prior year amounts have been made to conform to the current year presentation.
Use of Estimates
The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company bases these estimates on historical experience, the current economic environment and on various other assumptions that are believed to be reasonable under the circumstances. However, uncertainties associated with these estimates exist and actual results may differ materially from these estimates.
Acquisitions
The Company continually evaluates potential acquisitions that either strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into new and attractive business areas. Among other things, goodwill arises because the purchase prices for these businesses reflect a number of factors including the future earnings and cash flow potential of these businesses, the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers, the competitive nature of the processes by which the Company acquired the businesses, avoidance of the time and costs which would be required (and the associated risks that would be encountered) to enhance the Company’s existing product offerings to key target markets and enter into new and profitable businesses and the complementary strategic fit and resulting synergies these businesses bring to existing operations.
We account for acquisitions under Accounting Standards Codification (“ASC“) 805 Business Combinations and use the acquisition method of accounting. The consideration transferred for the acquisition of a subsidiary comprises (i) fair values of the assets transferred; (ii) liabilities assumed of the acquired business; and (iii) fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired, and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date.
The Company makes an initial allocation of the purchase price at the date of acquisition based upon its estimation of the fair value of the acquired assets and assumed liabilities. The Company obtains the information used to estimate the fair values during due diligence and through other sources. In the months after closing, up to 12 months, as the Company obtains additional information that existed at the acquisition date about these assets and liabilities, it is able to refine the estimates of fair value and more accurately allocate the purchase price. Only items that existed as of the acquisition date are considered for subsequent adjustment. The Company makes the appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Accounts Receivable and Allowances for Credit Losses
All trade accounts receivable are reported on the accompanying Consolidated Balance Sheets adjusted for any write-offs and net of allowances for credit losses. The allowances for credit losses represent management’s best estimate of the credit losses expected from the Company’s trade accounts receivable portfolio. Determination of the allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, therefore, net income. The Company regularly performs detailed reviews of its portfolios to determine if an impairment has occurred and evaluates the collectability of receivables based on a combination of various financial and qualitative factors that may affect customers’ ability to pay, including customers’ financial condition, debt-servicing ability, past payment experience and credit bureau information and forecasts. In circumstances where the Company is aware of a
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specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected.
Inventory Valuation
Inventories include the costs of material, labor and overhead. Inventories are stated at the lower of cost or net realizable value primarily using the first-in, first-out method. Market value for raw materials is based on replacement costs and for other inventory classifications is based on net realizable value. The Company periodically evaluates the quantities on hand relative to current and historical selling prices and historical and projected sales volume. Based on this evaluation, provisions are made to write inventory down to its net realizable value.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. The provision for depreciation has been computed principally by the straight-line method based on the estimated useful lives of the depreciable assets as follows:
Category Useful Life
Buildings 30 years
Machinery, equipment and other assets 3 – 10 years
Estimated useful lives are periodically reviewed and, when appropriate, changes to estimates are made prospectively.
Leases
The Company determines if an arrangement is a lease at inception and evaluates each lease agreement to determine whether the lease is an operating or finance lease. For leases where the Company is the lessee, right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent an obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit interest rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The ROU asset also consists of any prepaid lease payments, lease incentives received, costs which will be incurred in exiting a lease and the amount of any asset or liability recognized on business combinations relating to favorable or unfavorable lease terms. The lease terms used to calculate the ROU asset and related lease liability include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. In certain of the Company’s lease agreements, the rental payments are adjusted periodically to reflect actual charges incurred for common area maintenance, utilities, inflation and/or changes in other indexes.
Investments
Investments over which the Company has a significant influence but not a controlling interest, are accounted for using the equity method of accounting which requires the Company to record its initial investment at cost and adjust the balance each period for the Company’s share of the investee’s income or loss and dividends paid. No significant realized or unrealized gains or losses were recorded during the three years ended December 31, 2022, 2021 and 2020 with respect to these investments.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, trade accounts receivable, nonqualified deferred compensation plans, contingent consideration, derivatives, trade accounts payable and long-term debt. Due to their short-term nature, the carrying values for cash and cash equivalents, trade accounts receivable and trade accounts payable approximate fair value. Refer to Note 12 for the fair values of the Company’s other financial instruments.
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Goodwill and Other Intangible Assets
Goodwill and other intangible assets result from the Company’s acquisition of existing businesses. In accordance with accounting standards related to business combinations, goodwill is not amortized; however, certain finite-lived identifiable intangible assets, primarily customer relationships and acquired technology, are amortized over their estimated useful lives. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually in the fourth quarter of each fiscal year or whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. The Company first assessed qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or performed a quantitative impairment test. When tested quantitatively, the Company uses a combination of techniques, including an income approach and a market-based approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In making this assessment, management relies on a number of factors, including expected future operating results, business plans, economic projections, anticipated future cash flows, business trends and the Company’s market capitalization. The Company’s reporting units are the financial components of operating segments which constitute businesses for which discrete financial information is available and is regularly reviewed by segment management. The Company did not record any impairment loss for goodwill or indefinite-lived intangible assets in 2022, 2021 and 2020.
Management reviews the carrying amounts of other finite-lived intangible assets whenever events or circumstances indicate that the carrying amounts of an asset may not be recoverable. Impairment indicators include, among other conditions, cash flow deficits, historic or anticipated declines in revenue or operating profit, and adverse legal or regulatory developments. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable based on undiscounted estimated cash flows, their carrying values are reduced to estimated fair market value. Estimated fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. For the purposes of identifying and measuring impairment, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
Refer to Note 9 for additional information about the Company’s goodwill and other intangible assets.
Revenue Recognition
The Company derives revenues primarily from the sale of Specialty Products & Technologies and Equipment & Consumables products and services. Revenue is recognized when control of the promised products or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products or services (the transaction price). A performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under ASC 606. For equipment, consumables and spare parts sold by the Company, control transfers to the customer at a point in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer, the customer must have the significant risks and rewards of ownership, and where acceptance is not a formality, the customer must have accepted the product or service. The Company’s principal terms of sale are FOB Shipping Point, or equivalent, and, as such, the Company primarily transfers control and records revenue for product sales upon shipment. Sales arrangements with delivery terms that are not FOB Shipping Point are not recognized upon shipment and the transfer of control for revenue recognition is evaluated based on the associated shipping terms and customer obligations. If a performance obligation to the customer with respect to a sales transaction remains to be fulfilled following shipment (typically installation or acceptance by the customer), revenue recognition for that performance obligation is deferred until such commitments have been fulfilled. Returns for products sold are estimated and recorded as a reduction of revenue at the time of sale. Customer allowances and rebates, consisting primarily of volume discounts and other short-term incentive programs, are recorded as a reduction of revenue at the time of sale because these allowances reflect a reduction in the transaction price. Product returns, customer allowances and rebates are estimated based on historical experience and known trends. For extended warranty and service, control transfers to the customer over the term of the arrangement. Revenue for extended warranty and service is recognized based upon the period of time elapsed under the arrangement.
For a contract with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation on a relative standalone selling price basis using the Company’s best estimate of the standalone selling price of each distinct product or service in the contract. The primary method used to estimate standalone selling price is the price observed in standalone sales to customers; however, when prices in standalone sales are not available the Company may use third-party pricing for similar products or services or estimate the standalone selling price. Allocation of the transaction price is determined at the contracts’ inception. The Company does not adjust transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less.
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Shipping and Handling
Shipping and handling costs are considered a fulfillment cost and are included as a component of cost of sales. Revenue derived from shipping and handling costs billed to customers is included in sales.
Advertising
Advertising costs are expensed as incurred.
Research and Development
The Company conducts research and development activities for the purpose of developing new products, enhancing the functionality, effectiveness, ease of use and reliability of the Company’s existing products and expanding the applications for which uses of the Company’s products are appropriate. Research and development costs are expensed as incurred.
Income Taxes
Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Deferred tax assets generally represent items that can be used as a tax deduction or credit in the Company’s tax return in future years for which the tax benefit has already been reflected on the Company’s Consolidated Statements of Operations. The Company establishes valuation allowances for its deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized. Deferred tax liabilities generally represent items that have already been taken as a deduction on the Company’s tax return but have not yet been recognized as an expense in the Company’s Consolidated Statements of Operations. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in income tax expense in the period that includes the enactment date. The Company provides for unrecognized tax benefits when, based upon the technical merits, it is “more likely than not” that an uncertain tax position will not be sustained upon examination. Judgment is required in evaluating tax positions and determining income tax provisions. The Company re-evaluates the technical merits of its tax positions and may recognize an uncertain tax benefit in certain circumstances, including when: (1) a tax audit is completed; (2) applicable tax laws change, including a tax case ruling or legislative guidance; or (3) the applicable statute of limitations expires. The Company recognizes potential accrued interest and penalties associated with unrecognized tax positions in income tax expense.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022, which, among other things, implements a 15% minimum tax on book income of certain large corporations, a 1% excise tax on net stock repurchases and several tax incentives to promote clean energy. Based on the Company’s current analysis of the provisions, the Company does not believe this legislation will have a material impact on its Consolidated Financial Statements.
Restructuring
The Company periodically initiates restructuring activities to appropriately position the Company’s cost base relative to prevailing economic conditions and associated customer demand as well as in connection with certain acquisitions. Costs associated with productivity improvement and restructuring actions can include termination benefits and related charges in addition to facility closure, contract termination and other related activities. The Company records the cost of the restructuring activities when impairment is identified or when the associated liability is incurred. Refer to Note 20 for additional information.
Foreign Currency Translation
Exchange rate adjustments resulting from foreign currency transactions are recognized in net income, whereas effects resulting from the translation of financial statements are reflected as a component of accumulated other comprehensive loss within equity. Assets and liabilities of subsidiaries operating outside the United States with a functional currency other than U.S. dollars are translated into U.S. dollars using year-end exchange rates and income statement accounts are translated at weighted average rates. Net foreign currency transaction gains or losses were not material in any of the years presented.
Derivative Financial Instruments
The Company is neither a dealer nor a trader in derivative instruments. The Company has generally accepted the exposure to transactional exchange rate movements without using derivative instruments to manage this risk, although the Company from time to time partially hedges its net investments in foreign operations against adverse movements in exchange rates through foreign currency-denominated debt and cross-currency swaps. The Company may at times also enter into interest rate swaps to mitigate a portion of its interest rate risk related to the Company’s debt. The derivative instruments are recorded on the Consolidated Balance Sheets as either an asset or liability measured at fair value. To the extent the interest rate swap qualifies as an effective hedge, changes in fair value are recognized in accumulated other comprehensive loss within equity.
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Changes in the value of the foreign currency denominated debt and cross-currency swaps designated as hedges of the Company’s net investment in foreign operations based on spot rates are recognized in accumulated other comprehensive loss within equity and offset changes in the value of the Company’s foreign currency denominated operations. Refer to Note 11 for additional information on derivative financial instruments.
Loss Contingencies
The Company records a reserve for loss contingencies when it is both probable that a loss will be incurred and the amount of the loss is reasonably estimable. The Company evaluates pending litigation and other contingencies at least quarterly and adjusts the reserve for such contingencies for changes in probable and reasonably estimable losses.
Accumulated Other Comprehensive Loss
Foreign currency translation adjustments are generally not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries. Foreign currency translation adjustments related to the Company’s cross-currency swap arrangements and foreign currency denominated debt that are designated as net investment hedges are adjusted for income taxes as those arrangements are not indefinite. Changes in the funded status of the pension plans, net of taxes, are recognized in the year in which the changes occur and reported in other comprehensive loss.
Stock-Based Compensation
The Company accounts for stock-based compensation by measuring the cost of employee services received in exchange for all equity awards granted, including stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”), based on the fair value of the award as of the grant date. Equity-based compensation expense is recognized net of an estimated forfeiture rate on a straight-line basis over the requisite service period of the award, except that in the case of RSUs compensation expense is recognized using an accelerated attribution method. Refer to Note 17 for additional information on the stock-based compensation plan in which certain employees of the Company participate.
Pension Plans
The Company measures its pension assets and obligations that determine the funded status as of the end of the Company’s fiscal year, and recognizes an asset for an over funded status or a liability for an underfunded status in its Consolidated Balance Sheets. Changes in the funded status of the pension plans are recognized in the year in which the changes occur and reported in other comprehensive loss. Refer to Note 13 for additional information on the Company’s pension plans including a discussion of the actuarial assumptions, the Company’s policy for recognizing the associated gains and losses and the method used to estimate service and interest cost components.
Accounting Standards Recently Adopted
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805), which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers, as if it had originated the contracts, rather than at fair value. This standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The Company adopted this guidance on January 1, 2022, which did not have a significant impact on the Company’s Consolidated Financial Statements.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40),” (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. This guidance is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. ASU 2020-06 was effective for public entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Effective January 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective adoption approach. The cumulative effect of the change was recognized as an adjustment to the opening balance of retained earnings at the date of adoption. The comparative prior year information has not been restated and continues to be presented according to accounting standards in effect for those periods.
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The adoption of ASU 2020-06 resulted in a $75.0 million increase to the carrying value of the convertible notes due 2025, net of deferred debt issuance costs and unamortized discount and a decrease to additional paid-in capital of $77.8 million. Additionally, the adoption resulted in a $21.4 million increase to retained earnings and an $18.6 million decrease to the related net deferred tax liability associated with the reduction of unamortized debt discount and deferred debt issuance costs. Refer to Note 16 for a further discussion of the impact of adopting ASU 2020-06.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 is effective for public entities through December 31, 2022. However, in December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 to defer the effective date of ASU 2020-04 from December 31, 2022 to December 31, 2024. The Company adopted ASU 2020-04 as of December 31, 2022 and its adoption did not have an impact on the Company’s Consolidated Financial Statements.
NOTE 3. ACQUISITIONS
The Company completed the following acquisitions, using the acquisition method of accounting during, the year ended December 31, 2022:
Osteogenics Biomedical Inc., Allotech LLC and OBI Biologics, Inc.
On July 5, 2022, the Company acquired all of the equity of Osteogenics Biomedical Inc., Allotech LLC and OBI Biologics, Inc. (together "Osteogenics") for total consideration of approximately $128.2 million, subject to certain customary adjustments as provided in the Equity Purchase Agreement dated May 17, 2022. Osteogenics develops innovative regenerative solutions for periodontists, oral and maxillofacial surgeons, and clinicians involved in implant dentistry throughout the world, and is part of the Company’s Specialty Products & Technologies segment.
Carestream Dental Technology Parent Limited’s Intraoral Scanner Business
On April 20, 2022, the Company completed the acquisition of Carestream Dental Technology Parent Limited’s (“Carestream Dental”) intraoral scanner business (the “Intraoral Scanner Business”) for total consideration of $580.3 million, including contingent consideration of $7.5 million, and subject to certain customary adjustments as provided in the Stock and Asset Purchase Agreement dated December 21, 2021 and as subsequently amended by the closing agreement dated as of April 20, 2022. The Intraoral Scanner Business manufactures, markets, sells, commercializes, distributes, services, trains, supports, and maintains operations of intraoral scanners and software, and is part of the Company’s Equipment & Consumables segment. The Company purchased the Intraoral Scanner Business through the acquisition of certain assets and the assumption of certain liabilities as well as the acquisition of all of the equity of certain subsidiaries of Carestream Dental.
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The following table summarizes the fair values of the assets acquired and liabilities assumed as of the respective acquisition dates ($ in millions):
OsteogenicsJuly 5, 2022 Intraoral Scanner BusinessApril 20, 2022
Assets acquired:
Accounts receivable 2.5 0.1
Property, plant and equipment — 0.3
Prepaids and Other Current Assets 1.3 —
Non-current deferred tax asset — 96.0
Operating lease right-of-use assets 2.6 0.9
Other long-term assets 4.9 0.2
Liabilities assumed:
Accounts payable (4.1) (0.5)
Accrued expenses and other liabilities (2.5) (27.9)
Non-current deferred tax liability (14.3) —
Other long-term liabilities (5.8) —
Operating lease liabilities (2.1) (0.5)
Total liabilities assumed (28.8) (28.9)
Total net assets acquired $ 128.2 $ 580.3
The Company may up to 12 months after closing refine the estimates of fair value and more accurately allocate the purchase price. Only items that existed as of the acquisition date are considered for subsequent adjustment. The finalization of the acquisition valuation assessment for these acquisitions may result in a change in the valuation of deferred taxes and goodwill, which could have a material impact on the Company’s financial statements.
The intangible assets acquired consist of trade name, developed technology, and customer relationships. The weighted average amortization period of the acquired intangible assets in the aggregate is 8and 10 years for the Intraoral Scanner Business and Osteogenics, respectively.
The excess of the purchase price over the fair value assigned to the assets acquired and liabilities assumed represents the goodwill resulting from the acquisitions. Goodwill attributable to the acquisitions has been recorded as a non-current asset and is not amortized, but is subject to review at least on an annual basis for impairment. Goodwill recognized was primarily attributable to expected operating efficiencies and expansion opportunities in the businesses acquired. Goodwill is not deductible for income tax purposes. The pro forma impact of the acquisitions is not presented as the acquisitions were not considered material to the Company's Consolidated Financial Statements.
Legal, accounting, and other professional service costs associated with the acquisitions were $14.5 million for the year ended December 31, 2022, and have been recorded as selling, general and administrative expense in the Consolidated Statements of Operations.
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NOTE 4. DISCONTINUED OPERATIONS
On December 31, 2021, the Company sold substantially all of the KaVo Treatment Unit and Instrument Business (the “Divestiture”) to planmeca Verwaltungs Gmbh, Germany (“Planmeca”), pursuant to the master sale and purchase agreement (the “Purchase Agreement”) among the Company, Planmeca, and Planmeca Oy, as guarantor. On December 30, 2021, the Company entered into an amendment to the Purchase Agreement (the "Amendment"), providing that the transfer of net assets in Russia, China and Brazil (the "Relevant Jurisdictions") would be deferred until the purchaser had formed entities for such transfer of assets in each such Relevant Jurisdiction and the applicable asset transfer agreement could be executed and consummated (each such asset transfer, a "Deferred Local Closing"). Except for the implementation of the Deferred Local Closings and related matters regarding the assets in the Relevant Jurisdictions, the provisions, terms and conditions of the Purchase Agreement were not materially amended by the Amendment. The Amendment did not alter the preliminary purchase price that Planmeca paid to the Company upon the closing of the Divestiture and the Company recognized the applicable gain or loss at the time of each Relevant Jurisdiction’s applicable closing. At December 31, 2021, the Company recorded a liability of $10.8 million for the proceeds related to the Relevant Jurisdictions. At December 31, 2022, all three Relevant Jurisdictions have closed and the related liability associated with the proceeds released. In accordance with the terms of the Purchase Agreement, the Company received total net cash consideration of $386.4 million.
The results of the Divestiture are presented as discontinued operations for all periods presented in the accompanying Consolidated Financial Statements, with the exception of the Consolidated Statements of Cash Flows which include the financial results of the KaVo Treatment Unit and Instrument Business for all periods presented.
The carrying amounts of the assets and liabilities of the Divestiture held for sale are as follows ($ in millions):
ASSETS
Current assets:
Assets for Relevant Jurisdictions $ 12.2
Current assets held for sale $ 12.2
LIABILITIES AND EQUITY
Current liabilities:
Liabilities for Relevant Jurisdictions $ 4.0
Current liabilities held for sale $ 4.0
For the years ended December 31, 2021 and 2020, the amounts represent activity for the entire Divestiture, while amounts for the year ended December 31, 2022, represent activity for the remaining Relevant Jurisdictions prior to closing. The operating results of the Divestiture are reflected in the Consolidated Statements of Operations within income from discontinued operations, net of tax as follows ($ in millions):
Year Ended December 31
Operating expenses:
Selling, general and administrative 3.2 75.6 99.3
Research and development — 16.1 14.1
Operating (loss) profit (0.6) 87.2 (10.1)
Income tax expense — 21.9 (0.9)
(Loss) income from discontinued operations (0.6) 65.3 (9.2)
Gain on sale of discontinued operations, net of tax 5.7 11.7 —
Net income (loss) from discontinued operations $ 5.1 $ 77.0 $ (9.2)
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Significant non-cash operating items and capital expenditures for the Divestiture are reflected in the cash flows from operations as follows ($ in millions):
Year Ended December 31
Cash flows from operating activities
Non-cash restructuring charges $ — $ — $ 9.6
Impairment charges $ — $ — $ 10.5
Depreciation and amortization1 $ — $ 5.8 $ 10.9
Cash flows from investing activities:
Capital expenditures $ — $ 6.7 $ 3.8
NOTE 5.CREDIT LOSSES
The allowance for credit losses is a valuation account deducted from accounts receivable to present the net amount expected to be collected. Accounts receivable are charged off against the allowance when management believes the uncollectibility of an accounts receivable balance is confirmed.
Management estimates the adequacy of the allowance by using relevant available information, from internal and external sources, relating to past events, current conditions and forecasts. Historical credit loss experience provides the basis for estimation of expected credit losses and is adjusted as necessary using the relevant information available. The allowance for credit losses is measured on a collective basis when similar risk characteristics exist. The Company has identified one portfolio segment based on the following risk characteristics: geographic regions, product lines, default rates and customer specific factors.
The factors used by management in its credit loss analysis are inherently subject to uncertainty. If actual results are not consistent with management’s estimates and assumptions, the allowance for credit losses may be overstated or understated and a charge or credit to net income (loss) may be required.
The rollforward of the allowance for credit losses is summarized as follows ($ in millions):
Foreign currency translation (0.8)
Provision for credit losses 4.8
Write-offs charged against the allowance (4.1)
Recoveries (4.4)
NOTE 6. INVENTORIES
The classes of inventory as of December 31 are summarized as follows ($ in millions):
Reserve for inventory obsolescence (55.7) (60.8)
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NOTE 7. PROPERTY, PLANT AND EQUIPMENT
The classes of property, plant and equipment as of December 31 are summarized as follows ($ in millions):
Land and improvements $ 10.0 $ 10.7
Machinery, equipment and other assets 370.2 354.5
Construction in progress 71.2 45.6
Gross property, plant and equipment 605.9 579.5
Less: accumulated depreciation (312.3) (315.4)
Property, plant and equipment, net $ 293.6 $ 264.1
NOTE 8. LEASES
The Company has operating leases for office space, warehouses, distribution centers, research and development and manufacturing facilities, equipment and vehicles. Many leases include one or more options to renew, some of which include options to extend the lease for up to 20 years and some leases include options to terminate the lease within 30 days. The Company regularly evaluates the renewal options and, when the options are reasonably certain of being exercised, they are included in the lease term. In certain of the Company’s lease agreements, the rental payments are adjusted periodically to reflect actual charges incurred for common area maintenance, utilities, inflation and/or changes in other indexes. The Company has elected to combine lease and non-lease components for leases of all asset classes where the Company is the lessee. At inception, the Company determines whether an agreement represents a lease and, at commencement, evaluates each lease agreement to determine whether the lease is an operating or finance lease.
Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for leased facilities and vehicles, which are paid based on actual costs incurred.
The components of operating lease expense for the years ended December 31 were as follows ($ in millions):
Fixed operating lease expense (a) $ 31.7 $ 32.4
Variable operating lease expense 7.2 6.1
Total operating lease expense $ 38.9 $ 38.5
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(a) Includes short-term leases and sublease income, both of which were not significant.
The following table presents the weighted average remaining lease term and weighted average discount rates related to the Company’s operating leases as of December 31:
Weighted average remaining lease term 8 years 9 years
Weighted average discount rate 4.1 % 3.5 %
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The following table presents the maturity of the Company’s operating lease liabilities as of December 31, 2022 ($ in millions):
Total operating lease payments 171.7