Envista Holdings Corp (NVST) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussion of 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023.
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 dental consumables, solutions, technologies, and services. With leading brand names, innovative technology and strong market positions, we are a leading worldwide provider of a broad range of solutions to support implant-based tooth replacements, orthodontic treatments, and diagnostic solutions, as well as general dental consumable products, 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 2024, 52% of our sales were derived from customers outside the United States. As a global provider of dental consumable products, 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
General Economic Conditions
In addition to industry-specific factors, we, like other businesses, face challenges related to global economic conditions, including sustained inflation, increases in interest rates, fluctuating foreign currency exchange rates, slower economic growth, customer channel inventory realignment 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.
Foreign Exchange Rates
Significant portions of our sales and costs are exposed to changes in foreign exchange rates. During the year ended December 31, 2024, our products were sold in more than 130 countries and 52% 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 0.7% for the year ended December 31, 2024 compared to 2023, 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.
Pricing Controls
Certain 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 (“VBP”) 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 consumable products.
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
◦the 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 R&D, with a track record of product innovation, business development and commercialization.
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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.
Manufacturing and Supply
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.”
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. While we are experiencing volatility in sales from this region, Russia’s invasion of Ukraine did not have a material impact on our overall financial position or results of operations as of and for the years ended December 31, 2024 and 2023.
Israel-Hamas War and Related Conflict
In response to the attacks in Israel and the related hostilities and despite the recent ceasefire agreement and hostage deal, we continue to monitor the social, political, and economic environment in Israel and in the region for any impact to our operations. We maintain a production facility in Israel related to our Alpha-Bio Tech Implant brand. While we have experienced some volatility in the region, the Israel-Hamas War and related hostilities have not had a material impact on our business.
Trade Policies and Regulations
Increasing protectionism and economic nationalism may lead to further changes in trade policies and regulations, domestic sourcing initiatives, or other formal and informal measures that could make it more difficult to sell our products in, or restrict our access to, some markets. In particular, trade tensions between the U.S. and China have led to increased tariffs and trade restrictions. In addition, the U.S. has recently implemented new tariffs on China and proposed to significantly increase tariffs on foreign imports into the U.S. from other countries, particularly from Canada and Mexico. It is difficult to predict what further trade-related actions governments may take, which may include trade restrictions and additional or increased tariffs and export controls imposed on short notice. Existing and future tariffs may have a material adverse effect on our business and results of operations.
Assumptions Related To Aligner Treatment Plans
Our aligner business, included in the Specialty Products & Technologies segment, enters into revenue contracts that involve multiple future performance obligations which include optional aligners at no additional charge. Our treatment plans are comprised of the following performance obligations: initial aligner shipment and the subsequent shipments of any optional refinement aligners. For such plans, we also consider usage rates, which is the number of times a customer is expected to order additional refinement aligners. This usage rate is the basis for estimating the amount of transaction price to allocate to future performance obligations.
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We continually review and update the usage rate and other related assumptions. As part of this review throughout 2024, we updated our assumptions based on our evaluation of current inputs and historical usage data. This evaluation resulted in certain changes, including an increase in the aggregate amount of transaction price allocated to future performance obligations for new treatment plans entered into during the year, which impacted the timing of revenue recognition. Future changes to usage rates and related assumptions may impact the pattern of revenue recognition for future treatment plans. The process of estimating the number of times a clear aligner customer is expected to order additional aligners after the initial aligner shipment requires judgment and evaluation of inputs, including historical usage data in order to predict future usage patterns.
Components of Sales and Costs and Expenses
Sales
Our sales are primarily derived from the sale of dental consumable products, 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.”
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 are productivity improvement and restructuring expenses related to our SG&A.
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.
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), net gains or losses on equity investments, inducement charges related to convertible debt exchanges, and interest expense, net.
Business Performance
During the year ended December 31, 2024, our sales decreased 2.2%, while core sales decreased 1.5% as compared to the comparable period of 2023. The impact of foreign currency exchange rates reduced sales in the year ended December 31, 2024, by 0.7% compared to the comparable period of 2023.
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.
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 for one year from the acquisition date;
•sales from discontinued products; and
•the impact of currency translation.
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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.
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.
RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated statements of earnings should be read along with our 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 10-K refer to continuing operations only. For more information on the consolidated basis of preparation, see Note 1 to our Consolidated Financial Statements elsewhere in this Annual Report on Form 10-K.
| Years Ended December 31, | % Change | % Change | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2024 | 2023 | 2022 | 2024/2023 | 2023/2022 | |||||||||||||
| Sales | $ | 2,510.6 | 100.0% | $ | 2,566.5 | 100.0% | $ | 2,569.1 | 100.0% | (2.2) | % | (0.1) | % | |||||
| Cost of sales | 1,137.9 | 45.3% | 1,126.0 | 43.9% | 1,094.3 | 42.6% | 1.1 | % | 2.9 | % | ||||||||
| Gross profit | 1,372.7 | 54.7% | 1,440.5 | 56.1% | 1,474.8 | 57.4% | (4.7) | % | (2.3) | % | ||||||||
| Operating costs: | ||||||||||||||||||
| SG&A expenses | 1,158.0 | 46.1% | 1,056.9 | 41.2% | 1,055.5 | 41.1% | 9.6 | % | 0.1 | % | ||||||||
| R&D expenses | 99.1 | 3.9% | 93.8 | 3.7% | 100.1 | 3.9% | 5.7 | % | (6.3) | % | ||||||||
| Goodwill and intangible asset impairment | 1,153.8 | 46.0% | 258.3 | 10.1% | — | —% | NM | NM | ||||||||||
| Operating (loss) profit | (1,038.2) | (41.4)% | 31.5 | 1.2% | 319.2 | 12.4% | NM | (90.1) | % | |||||||||
| Nonoperating (expense) income: | ||||||||||||||||||
| Other (expense) income, net | (0.1) | —% | (23.0) | (0.9)% | 3.1 | 0.1% | (99.6) | % | NM | |||||||||
| Interest expense, net | (46.4) | (1.8)% | (63.4) | (2.5)% | (38.4) | (1.5)% | (26.8) | % | 65.1 | % | ||||||||
| (Loss) income before income taxes | (1,084.7) | (43.2)% | (54.9) | (2.1)% | 283.9 | 11.1% | NM | (119.3) | % | |||||||||
| Income tax expense | 33.9 | 1.4% | 45.3 | 1.8% | 45.9 | 1.8% | (25.2) | % | (1.3) | % | ||||||||
| (Loss) income from continuing operations | (1,118.6) | (44.6)% | (100.2) | (3.9)% | 238.0 | 9.3% | NM | (142.1) | % | |||||||||
| Income from discontinued operations, net of tax | — | —% | — | —% | 5.1 | 0.2% | — | % | (100.0) | % | ||||||||
| Net (loss) income | $ | (1,118.6) | (44.6)% | $ | (100.2) | (3.9)% | $ | 243.1 | 9.5% | NM | (141.2) | % | ||||||
| Effective tax rate | (3.1) | % | (82.5) | % | 16.2 | % | ||||||||||||
| NM - Non-meaningful percentage change related to year-to-year comparisons |
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Business Segments
Sales by business segment were as follows ($ in millions):
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||
| Specialty Products & Technologies | $ | 1,616.4 | $ | 1,642.4 | $ | 1,598.6 | ||||
| Equipment & Consumables | 894.2 | 924.1 | 970.5 | |||||||
| Total | $ | 2,510.6 | $ | 2,566.5 | $ | 2,569.1 |
GAAP Reconciliation
Sales and Core Sales Growth
| 2023 vs. 2024 | 2023 vs. 2022 | ||||
|---|---|---|---|---|---|
| Total sales growth (GAAP) | (2.2) | % | (0.1) | % | |
| Less the impact of: | |||||
| Acquisitions | — | % | (1.2) | % | |
| Currency exchange rates | 0.7 | % | 0.9 | % | |
| Core sales growth (non-GAAP) | (1.5) | % | (0.4) | % |
Sales and core sales growth for the year ended December 31, 2024 decreased 2.2% and 1.5%, respectively, compared to the comparable period in 2023. The decrease in sales volume was primarily driven by channel inventory realignment, and changes to revenue deferral related to our aligner treatment plans which negatively impacted sales by 2.2% on a period-over-period basis, partially offset by an increase in sales price of 0.7%. Geographically, sales volume was negatively impacted by lower demand in Europe, China and North America, partially offset by strong demand in Russia.
COST OF SALES AND GROSS PROFIT MARGIN
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2024 | 2023 | 2022 | |||||||
| Cost of sales | $ | 1,137.9 | $ | 1,126.0 | $ | 1,094.3 | ||||
| Gross profit margin | 54.7 | % | 56.1 | % | 57.4 | % |
The increase in cost of sales and decrease in gross profit margin during the year ended December 31, 2024, as compared to the comparable period in 2023, was primarily driven by unfavorable product mix, the impairment of certain long-lived assets and lower period-over-period savings associated with productivity improvements. The decrease in gross profit margin percentage was further impacted by lower volume driven by channel inventory realignment, and changes to revenue deferral related to our clear aligner treatment plans, partially offset by a 0.7% increase in sales price.
OPERATING EXPENSES
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2024 | 2023 | 2022 | |||||||
| Selling, general and administrative expenses | $ | 1,158.0 | $ | 1,056.9 | $ | 1,055.5 | ||||
| Research and development expenses | $ | 99.1 | $ | 93.8 | $ | 100.1 | ||||
| Goodwill and intangible asset impairment | $ | 1,153.8 | $ | 258.3 | $ | — | ||||
| SG&A as a % of sales | 46.1 | % | 41.2 | % | 41.1 | % | ||||
| R&D as a % of sales | 3.9 | % | 3.7 | % | 3.9 | % |
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The increase in SG&A expenses as a percentage of sales for the year ended December 31, 2024, as compared to the comparable period of 2023, was primarily due to higher sales and marketing investments, increased compensation, increased bad debt, higher restructuring costs, and higher legal settlement costs, partially offset by a decrease in amortization of intangible assets.
R&D expenses as a percentage of sales for the year ended December 31, 2024, was consistent with the comparable period in 2023.
Goodwill and intangible asset impairment for the year ended December 31, 2024 of $1,153.8 million consisted of a $960.5 million goodwill charge and a $193.3 million intangible asset charge. Approximately $707.8 million of the goodwill impairment charge related to our Specialty Products & Technologies segment and $252.7 million related to our Equipment & Consumables segment. The reduction in value was primarily due to adverse macroeconomic factors such as, higher cost of borrowing and inflationary pressures, geopolitical factors and weakened global demand which contributed to reduced expectations of future cash flows and a sustained suppressed stock price.
The intangible asset impairment charges consisted of $101.1 million related to certain indefinite-lived trade names within the Specialty Products & Technologies segment and $92.2 million which consisted of certain finite-lived patents and technology and customer relationships within the Equipment & Consumables segment and was primarily due to a reduction in projected cash flows discussed above.
Goodwill and intangible asset impairment for the year ended December 31, 2023 consisted of a $212.3 million goodwill charge and a $46.0 million intangible asset charge. Approximately $134.5 million of the goodwill impairment charge related to our Specialty Products & Technologies segment and $77.8 million related to our Equipment & Consumables segment. The reduction in value was primarily due to significant increases in discount rates utilized in valuing these reporting units, adverse macroeconomic factors such as higher cost of borrowing and inflationary pressures, geopolitical factors, and lower forecast of operating results which contributed to reduced expectation of future cash flows. The intangible asset impairment charge related to certain indefinite-lived trade names within the Specialty Products & Technologies segment. The reduction in the intangible value was primarily due to higher discount rates and reduction in projected cash flows as discussed above.
OTHER (EXPENSE) INCOME, NET
Other (expense) income, net for the year ended December 31, 2024 consists primarily of net losses on investments, offset by net periodic benefit costs. Other expenses, net for the year ended December 31, 2023 consists primarily of $29.0 million of inducement and other expenses associated with the Notes Exchanges, offset by a $3.6 million net gain on investments.
INTEREST COSTS AND FINANCING
Interest costs were $46.4 million and $63.4 million for the years ended December 31, 2024 and 2023, respectively. The decrease in interest expense for the year ended December 31, 2024 as compared to the comparable period of 2023 was primarily due to higher returns on cash and cash equivalents and lower variable rate term borrowings and interest rates.
For a discussion of our outstanding indebtedness, refer to Note 16 to our Consolidated Financial Statements elsewhere in this Annual Report on Form 10-K.
INCOME TAXES
| For the Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||
| Effective tax rate | (3.1) | % | (82.5) | % | 16.2 | % |
Our effective tax rate for the year ended December 31, 2024 was (3.1)% compared to (82.5)% in 2023. The change in the effective rate was primarily due to larger nondeductible impairment charges for goodwill in the current year compared to the prior year.
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SPECIALTY PRODUCTS & TECHNOLOGIES
Our Specialty Products & Technologies segment primarily develops, manufactures and markets dental implant systems, including regenerative products, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products.
Specialty Products & Technologies Selected Financial Data
| For the Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2024 | 2023 | 2022 | |||||||
| Sales | $ | 1,616.4 | $ | 1,642.4 | $ | 1,598.6 | ||||
| Operating profit | 89.9 | 232.1 | 268.6 | |||||||
| Operating profit as a % of sales | 5.6 | % | 14.1 | % | 16.8 | % |
GAAP Reconciliation
Sales and Core Sales Growth
| 2024 vs. 2023 | 2023 vs. 2022 | ||||
|---|---|---|---|---|---|
| Total sales growth (GAAP) | (1.6) | % | 2.7 | % | |
| Less the impact of: | |||||
| Acquisitions | — | % | (1.1) | % | |
| Currency exchange rates | 0.7 | % | 1.3 | % | |
| Core sales growth (non-GAAP) | (0.9) | % | 2.9 | % |
Sales
Sales and core sales growth for the year ended December 31, 2024 decreased 1.6% and 0.9%, respectively, compared to the comparable period in 2023. The decrease in sales and core sales was primarily due to changes to revenue deferral related to our clear aligner treatment plans on a period-over-period basis. Sales volume and price also declined by 0.7% and 0.2%, respectively, compared to the comparable period in 2023.
Geographically, sales for the year ended December 31, 2024 decreased primarily due to lower demand in North America and Europe, partially offset by Russia.
Operating Profit
Operating profit margin was 5.6% for the year ended December 31, 2024, as compared to an operating profit margin of 14.1% for the comparable period of 2023. The decrease in operating profit margin was primarily due to lower sales, including the impact from changes to the revenue deferral related to our clear aligner treatment plans, the impairment of certain long-lived assets, unfavorable product mix, lower period-over-period savings associated with productivity improvements, higher bad debt costs, and our investment in our long-term growth initiatives.
EQUIPMENT & CONSUMABLES
Our Equipment & Consumables segment primarily 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 consumable products; 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, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2024 | 2023 | 2022 | |||||||
| Sales | $ | 894.2 | $ | 924.1 | $ | 970.5 | ||||
| Operating profit | 152.3 | 156.3 | 172.4 | |||||||
| Operating profit as a % of sales | 17.0 | % | 16.9 | % | 17.8 | % |
GAAP Reconciliation
Sales and Core Sales Growth
| 2024 vs. 2023 | 2023 vs. 2022 | ||||
|---|---|---|---|---|---|
| Total sales growth (GAAP) | (3.2) | % | (4.8) | % | |
| Less the impact of: | |||||
| Acquisitions | — | % | (1.5) | % | |
| Currency exchange rates | 0.6 | % | 0.4 | % | |
| Core sales growth (non-GAAP) | (2.6) | % | (5.9) | % |
Sales
Sales and core sales growth for the year ended December 31, 2024 decreased 3.2% and 2.6%, respectively, compared to the comparable period in 2023. A decrease in sales volume driven by channel inventory realignment negatively impacted sales by 4.8% on a period-over-period basis, partially offset by an increase in sales price of 2.2%. Geographically, sales for the year ended December 31, 2024 decreased primarily due to lower demand from Europe and China, partially offset by Russia and North America.
Operating Profit
Operating profit margin was 17.0% for the year ended December 31, 2024, as compared to an operating profit margin of 16.9% for the comparable period of 2023. The increase in operating profit margin was primarily due to an increase in sales price and a decrease in amortization of intangibles, partially offset by a decrease in sales volume driven by channel inventory realignment and unfavorable product mix.
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 the year ended December 31, 2022 as discussed in Note 3 to our Consolidated Financial Statements elsewhere in this Annual Report on Form 10-K:
Overview of Cash Flows and Liquidity
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | 2024 | 2023 | 2022 | |||||||
| Net cash provided by operating activities | $ | 336.5 | $ | 275.7 | $ | 182.7 | ||||
| Payments for additions to property, plant and equipment | $ | (33.8) | $ | (58.2) | $ | (75.7) | ||||
| Purchases of investments held in rabbi trust | (32.8) | — | — | |||||||
| Proceeds from sale of investments held in rabbi trust | 9.3 | — | — | |||||||
| Proceeds from sales of property, plant and equipment | 0.1 | 6.1 | 3.3 | |||||||
| Proceeds from sale of equity investment | 0.4 | 10.7 | — | |||||||
| Acquisitions, net of cash acquired | — | — | (696.2) | |||||||
| Proceeds from sale of KaVo Treatment Unit and Instrument Business | — | — | 73.9 | |||||||
| Proceeds from the settlement of derivative financial instruments | 2.5 | 1.6 | 56.0 | |||||||
| All other investing activities | (0.3) | (22.6) | (18.6) | |||||||
| Net cash used in investing activities | $ | (54.6) | $ | (62.4) | $ | (657.3) | ||||
| Proceeds from stock option exercises | $ | 2.4 | $ | 11.3 | $ | 21.8 | ||||
| Tax withholding payment related to net settlement of equity awards | (5.3) | (7.9) | (9.1) | |||||||
| Proceeds from issuance of convertible notes due 2028 | — | 500.2 | — | |||||||
| Debt issuance costs related to issuance of convertible notes due 2028 | — | (13.8) | — | |||||||
| Principal paid related to exchange of convertible notes due 2025 | — | (401.2) | — | |||||||
| Proceeds from borrowing | — | 323.5 | 0.3 | |||||||
| Repayments of borrowing | (100.0) | (288.8) | (0.5) | |||||||
| Debt issuance costs related to other borrowings | — | (4.5) | — | |||||||
| Proceeds from revolving line of credit | — | — | 124.0 | |||||||
| Repayment of revolving line of credit | — | — | (124.0) | |||||||
| All other financing activities | (0.8) | 0.1 | — | |||||||
| Net cash (used in) provided by financing activities | $ | (103.7) | $ | 118.9 | $ | 12.5 |
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 $336.5 million during the year ended December 31, 2024, as compared to net cash provided by operating activities of $275.7 million in 2023. The increase is primarily due to better overall working capital management and 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.
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Net cash used in investing activities was $54.6 million during the year ended December 31, 2024, as compared to net cash used in investing activities of $62.4 million for the comparable period in 2023. The decrease is primarily due to lower net payments for purchases of property, plant and equipment, partially offset by the net purchases of investments held in a rabbi trust combined with the absence of proceeds for the sale of an equity investment in the prior year.
Financing Activities
Cash flow relating to financing activities consist primarily of cash flows associated with debt borrowings and the issuance of common stock.
Net cash used in financing activities was $103.7 million during the year ended December 31, 2024, compared to net cash provided by financing activities of $118.9 million for the comparable period of 2023 and was primarily due to a repayment of $100.0 million of the 2028 Term Loan during 2024 compared to net borrowings during 2023.
For a description of our outstanding debt as of December 31, 2024, refer to Note 16 to our 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, 2024, we had no borrowings outstanding under the revolving credit facility and we had the ability to incur an additional $750.0 million of indebtedness in direct borrowings under the revolving credit facility. As of December 31, 2024, we were in compliance with all of our debt covenants.
Cash and Cash Requirements
As of December 31, 2024, $1,069.1 million of cash and cash equivalents were held on deposit with financial institutions. Of this amount, $218.3 million was held within the United States and $850.8 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.”
Generally, cash and cash equivalents held in these financial institutions may be withdrawn or redeemed at face value, and we therefore believe that minimal credit risk exists with respect to them. Nonetheless, deposits with these financial institutions exceed the Federal Deposit Insurance Corporation (FDIC) insurance limits or similar limits in foreign jurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash and cash equivalent balances in the operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our funds fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our cash and cash equivalents will not be affected if the financial institutions where we hold our cash and cash equivalents fail.
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. In early 2025, we transferred approximately $320 million in international cash to the United States.
Following enactment of the Tax Cut and Jobs Act of 2017 (“TCJA”) and the associated transition tax, in general, repatriation of cash to the United States can be completed with no incremental U.S. tax; however, repatriation of cash could subject us to non-U.S. jurisdictional taxes on distributions. Additionally, we have determined that unremitted foreign earnings are not considered indefinitely reinvested to the extent foreign earnings can be distributed without a significant tax cost. As such, we have recorded foreign withholding tax liabilities related to the future repatriation of such earnings. We continue to indefinitely reinvest all other outside basis differences to the extent reversal would incur a significant tax liability.
As of February 7, 2025, we believe that we have sufficient sources of liquidity to satisfy our cash needs over the next 12 months and beyond, including our cash needs in the United States.
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Purchase Obligations
The Company’s purchase obligations primarily consist of agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction.
The following table sets forth, by period due or year of expected expiration, as applicable, a summary of purchase obligations as of December 31, 2024.
| Amount of Commitment Expiration per Period | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| ($ in millions) | Total | Less Than One Year | 1-3 Years | 4-5 Years | More Than 5 Years | |||||||||||||
| Purchase Obligations | $ | 96.6 | $ | 87.7 | $ | 8.9 | $ | — | $ | — |
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.”
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, 2024.
| 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 | $ | 12.6 | $ | 6.6 | $ | 5.4 | $ | 0.2 | $ | 0.4 |
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 August 31, 2023, we entered into the Second Amended Credit Agreement, whereby we entered into the senior term loan facility due 2028 for $530.0 million and the senior euro term loan facility due 2028 for €350.0 million (collectively the “2028 Term Loans”). The Second Amended Credit Agreement also includes a revolving credit facility with an aggregate available borrowing capacity of $750.0 million. The Senior Credit Facilities mature on August 31, 2028, and are subject to an earlier maturity date of 91 days prior to the maturity date of the 2028 Convertible Notes, if more than $250.0 million of such notes are outstanding at that time.
The proceeds from the Second Amended Credit Agreement were used to repay outstanding indebtedness for the senior term loan facility due 2024 (the “2024 Term Loan”) and the senior euro term loan facility due 2024 (the “2024 Euro Term Loan”). Additionally, we paid fees aggregating approximately $5.2 million in connection with the Second Amended Credit Agreement.
The Company repaid $100.0 million of the 2028 Term Loan during the year ended December 31, 2024.
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2028 Convertible Notes
On August 10, 2023, we issued the 2028 Convertible Notes due on August 15, 2028, 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 $65.2 million principal amount of the 2028 Convertible Notes, was $500.2 million. The net proceeds from the issuance, after deducting purchasers’ discounts and estimated offering expenses, were $485.9 million. We used a portion of the net proceeds to partially exchange the 2025 Convertible Notes. The 2028 Convertible Notes will accrue interest at a rate of 1.75% per annum, payable semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2024. The 2028 Convertible Notes have an initial conversion rate of 21.5942 shares of our common stock per $1,000 principal amount, which is equivalent to an initial conversion price of approximately $46.31 per share of our common stock and is subject to adjustment upon the occurrence of specified events. The 2028 Convertible Notes have customary provisions relating to the occurrence of “Events of Default” (as defined in the Indenture governing the 2028 Convertible Notes).
Notes Exchanges
Concurrently with the offering of the 2028 Convertible Notes, in separate, privately negotiated transactions, we entered into exchange agreements with a limited number of holders of the 2025 Convertible Notes to exchange $401.2 million principal amount of the 2025 Convertible Notes for aggregate consideration of approximately $403.0 million in cash, including accrued interest, and approximately 8.4 million shares of our common stock. We may engage in additional exchanges, or we may repurchase or induce conversions, of the remaining 2025 Convertible Notes.
Capped Call Transactions
In connection with the offering of the 2025 Convertible Notes, we entered into the Capped Calls with certain counterparties. The Capped Calls have an initial strike price of approximately $21.01 per share, subject to certain adjustments, which corresponds to the initial conversion price of the 2025 Convertible Notes. The Capped Calls have initial cap prices of $23.79 per share, subject to certain adjustments. The Capped Calls are generally intended to reduce or offset the potential dilution from shares of common stock issued upon any conversion 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.
Simultaneously with the Notes Exchanges, we also completed a partial unwind of the Capped Calls resulting in a repurchase of 1.0 million shares of our common stock. The Capped Calls will mitigate dilution for the conversion of the remaining 2025 Convertible Notes up to our common stock price of $23.79. If the remaining 2025 Convertible Notes are converted at a price higher than $23.79 per share, the Capped Calls will no longer mitigate dilution from the conversion of the 2025 Convertible Notes.
For a description of our outstanding debt as of December 31, 2024, refer to Note 16 to our Consolidated Financial Statements in this Annual Report on Form 10-K.
Legal Proceedings
Please refer to Note 15 to our 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.”