Envista Filing 2019-07-22
NVST Filing
As filed with the U.S. Securities and Exchange Commission on July 22, 2019.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ENVISTA HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 3843 | 83-2206728 |
(State or other jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (I.R.S. Employer Identification Number) |
c/o Envista Holdings Corporation
200 S. Kraemer Blvd., Building E
Brea, California 92821
(714) 817-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
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James F. O’Reilly
Vice President, Associate General Counsel and Secretary
Danaher Corporation
2200 Pennsylvania Avenue, N.W., Suite 800W
Washington, D.C. 20037-1701
(202) 828-0850
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
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Copies to:
Thomas W. Greenberg Michael J. Zeidel Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 Telephone: (212) 735-3000 Facsimile: (212) 735-2000 | Marc D. Jaffe Gregory P. Rodgers Benjamin J. Cohen Latham & Watkins LLP 885 Third Avenue New York, New York 10022 Telephone: (212) 906-1200 Facsimile: (212) 751-4864 |
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Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated filer | ý | Smaller reporting company | ☐ |
Emerging growth company | ☐ | ||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
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CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities to be Registered | Proposed Maximum Aggregate Offering Price (1)(2) | Amount of Registration Fee (3) |
Common stock, $0.01 par value per share | $100,000,000 | $12,120 |
(1) | Includes shares of our common stock which may be sold pursuant to the underwriters’ option to purchase additional shares. |
(2) | Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. |
(3) | To be paid in connection with the initial filing of the registration statement. |
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The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.
 | Subject to completion, dated July 22, 2019 Preliminary Prospectus Shares  Envista Holdings Corporation Common Stock $ per share This is the initial public offering of common stock of Envista Holdings Corporation. We are offering shares of our common stock. Prior to this offering, there has been no public market for our common stock. We currently expect the initial public offering price to be between $ and $ per share of common stock. We intend to apply to have our shares of common stock listed on the New York Stock Exchange (“NYSE”) under the symbol “NVST.” After the completion of this offering, Danaher will continue to own a majority of the total voting power of our outstanding shares. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. See “Management—Controlled Company Exception.” Investing in our shares of common stock involves a high degree of risk. See “Risk Factors” beginning on page 16. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. | ||||||
Per Share | Total | ||||||
Initial public offering price | $ | $ | |||||
Underwriting discount (1) | $ | $ | |||||
Proceeds, before expenses, to Envista | $ | $ | |||||
(1) See “Underwriting” for a description of the compensation payable to the underwriters. | |||||||
We have granted the underwriters an option to purchase up to additional shares of our common stock at the initial public offering price less the underwriting discount for 30 days after the date of this prospectus. The underwriters expect to deliver the shares against payment in New York, New York on , 2019 through the book-entry facilities of The Depository Trust Company. J.P. Morgan Prospectus dated , 2019 | |||||||
TABLE OF CONTENTS
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Through and including , 2019 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
Neither we nor the underwriters have authorized anyone to provide any information other than that contained in this prospectus, any amendment or supplement to this prospectus or in any free writing prospectus prepared by or on our behalf. Neither we nor the underwriters are making an offer to sell these securities in any jurisdiction where the offer or sale thereof is not permitted. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus is accurate only as of the date of this prospectus regardless of the time of delivery of this prospectus or any sale of our shares of common stock. Our business, prospects, financial condition and results of operations may have changed since that date.
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ABOUT THIS PROSPECTUS
In connection with the consummation of this offering, we will enter into a series of transactions with Danaher pursuant to which Danaher will transfer the assets and liabilities of its Dental business to us. In exchange, we will, as consideration, issue to Danaher shares of our common stock and pay Danaher all of the net proceeds that we will receive from the sale of our common stock in this offering, including any net proceeds that we will receive as a result of any exercise of the underwriters’ option to purchase additional shares, and approximately $1.5 billion of proceeds from term debt financing that we will enter into prior to the closing of this offering, as further described in the section entitled “Description of Certain Indebtedness.” We refer to these transactions, as further described in the section entitled “The Separation and Distribution Transactions—The Separation,” collectively as the “separation.” Except as otherwise indicated or unless the context otherwise requires, the information included in this prospectus about Envista assumes the completion of the separation. See “The Separation and Distribution Transactions” for a description of the separation.
Unless the context otherwise requires, (i) references in this prospectus to “Envista,” the “Company,” “we,” “us” and “our” refer to Envista Holdings Corporation, a Delaware corporation, and its consolidated subsidiaries after giving effect to the separation, (ii) references in this prospectus to the “Dental business” or Envista’s historical business and operations refer to the business and operations of Danaher’s Dental segment that will be transferred to Envista in connection with the separation, and (iii) references in this prospectus to “Danaher” and “Parent” refer to Danaher Corporation, a Delaware corporation, and its consolidated subsidiaries, unless the context otherwise requires.
Market, Industry and Other Data
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from third-party sources and management estimates. Our management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause future performance to differ materially from our assumptions and estimates. See “Cautionary Statement Concerning Forward-Looking Statements.”
Trademarks and Trade Names
The name and mark, Envista, and other trademarks, trade names and service marks of Envista appearing in this prospectus are our property or, as applicable, licensed to us, or, as applicable, prior to the completion of this offering, are the property of Danaher. The name and mark, Danaher Corporation, and other trademarks, trade names and service marks of Danaher appearing in this prospectus are the property of Danaher. This prospectus also contains additional trade names, trademarks and service marks belonging to other companies. We do not intend our use or display of other parties’ trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
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SUMMARY
This summary highlights information included elsewhere in this prospectus and does not contain all of the information you should consider in making an investment decision. You should read this entire prospectus carefully, including the sections entitled “Risk Factors,” “Cautionary Statement Concerning Forward-Looking Statements,” “Selected Historical Combined Financial Data,” “Unaudited Pro Forma Combined Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”(“MD&A”) and our combined financial statements and the notes thereto (the “Combined Financial Statements”) before making an investment decision regarding our common stock.
Our Company
Envista is one of the largest global dental products companies with significant market positions in some of the most attractive segments of the dental products industry, including implants, orthodontics and digital imaging technologies. We develop, manufacture and market one of the most comprehensive portfolios of dental consumables, equipment and services to dental professionals covering an estimated 90% of dentists’ clinical needs for diagnosing, treating and preventing dental conditions as well as improving the aesthetics of the human smile. Our executive officer team has extensive dental industry experience and over 50 years of collective service with Danaher. In 2018, we generated total sales of $2,845 million, of which approximately 70% were derived from sales of consumables, services and spare parts.
Our operating companies, Nobel Biocare Systems, Ormco and KaVo Kerr, serve more than 1 million dentists in over 150 countries through one of the largest commercial organizations in the dental products industry and through our dealer partners. Our commercial organization includes over 3,000 employees with deep clinical, product and workflow expertise who interact with customers on a daily basis. We are also a leading global provider of clinical training to enhance patient access to high-quality dental care, reaching over 100,000 dental professionals annually through more than 4,000 training and education events we directly organize.
We generated 23% (or $655 million) of sales from high-growth markets in 2018. Our growing scale in these markets has been driven by strategic investments in underpenetrated markets, such as the Greater China region (mainland China, Hong Kong, Taiwan, Macau and Zhuhai), where we had sales of $213 million in 2018 and currently have a commercial organization of more than 400 employees. We define high-growth markets as developing markets of the world experiencing extended periods of accelerated growth in gross domestic product and infrastructure, which include Eastern Europe, the Middle East, Africa, Latin America and Asia (with the exception of Japan and Australia). We define developed markets as all markets of the world that are not high-growth markets.
We believe that in 2018 our research and development (“R&D”) expenditure of $172 million was one of the highest R&D spends in the dental products industry. Through our increased investments in R&D, we have accelerated multiple new product development initiatives, such as the DTXTM software suite, the N1TM implant system and SparkTM Aligners.
Our Specialty Products & Technologies segment comprised of our Nobel Biocare Systems and Ormco operating companies, develops, manufactures and markets dental implant systems, dental prosthetics and associated treatment software and technologies, as well as orthodontic bracket systems, aligners and lab products. We typically market these products directly to customers through our commercial organization, and approximately 90% of our 2018 sales for this segment were direct sales. In 2018, our Specialty Products & Technologies segment generated $1,370 million of sales.
Our Equipment & Consumables segment, comprised of our KaVo Kerr operating company, develops, manufactures and markets dental equipment and supplies used in dental offices, including digital imaging systems, software and other visualization/magnification systems; handpieces and associated consumables; treatment units and other dental practice equipment; endodontic systems and related consumables; restorative materials and instruments, rotary burs, impression materials, bonding agents and cements and infection prevention products. We sell our Equipment & Consumables segment products primarily through our channel partners, representing approximately 90% of sales in this segment in 2018. In 2018, our Equipment & Consumables segment generated $1,475 million of sales.
Our History and Transformation
As a platform of Danaher Corporation, Envista was built through the acquisition and integration of over 25 leading dental businesses and brands over the course of more than 15 years. We believe our business today has one of the most comprehensive offerings in the dental products industry. Beginning in 2016, we consolidated our operating companies, reduced our manufacturing sites from 44 to 33, consolidated almost 150 sales offices into less than 80, streamlined our R&D organization, and centralized our direct and indirect procurement organizations. These efforts have helped our free cash flow (referred to in “—Summary Historical and Pro Forma Combined Financial Data”) to exceed our net earnings in each of the three years ended December 31, 2018.
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We organize our operating companies in a way that leverages long histories of brand leadership across their respective product categories. Consolidating our multiple brands helps ensure alignment of our product and commercial strategies, allows us to better meet the needs of a broad set of customers, and facilitates an efficient and effective innovation pipeline. Streamlining our business operations has also allowed us to increase our salesforce and reinvest significant resources in initiatives such as expanding our R&D spend and expanding our presence in high-growth markets, which we believe will help drive long-term market leadership.
Industry Overview
We believe the global dental products industry is an attractive and growing sector within healthcare with estimated total product sales of approximately $23 billion in 2018, which we estimate has grown at an average, annual mid-single digit rate over the last three years. While the U.S. represents a significant portion of the global dental products market, we have also been focused on building significant scale in high-growth markets. Within the global dental products industry, we believe segments such as Imaging, Implants and Orthodontics will grow at a more rapid pace than the overall market.
We believe future growth of the dental products industry will be driven by:
• | an aging population; |
• | the current underpenetration of dental procedures, especially in high-growth markets; |
• | improving access to complex procedures due to increasing technological innovation; |
• | an increasing demand for cosmetic dentistry; and |
• | growth of Dental Support Organizations (“DSOs”), which are expected to drive increasing penetration and access to care globally. |
Our Competitive Strengths
We believe we have significant competitive strengths, including:
• | Brand leadership with a long track record and strong brand recognition. We built our business around brands with long histories of innovation and strong brand recognition in the dental products market. The founder of our Nobel Biocare Systems operating company introduced the world’s first dental implant and Nobel Biocare Systems has since become a world leader in the field of innovative implant-based dental restorations. Our Ormco operating company has over 50 years of distinguished history providing orthodontists with high quality, innovative products. Multiple brands within our KaVo Kerr operating company have more than 100 years of history in dental products. We believe the long history and leadership of our well-known brands in the dental products industry enhances our connections with both patients and providers, and supports our strong market position. |
• | Comprehensive portfolio with leadership in key attractive segments. We believe we have one of the most comprehensive offerings in the industry, enabling us to be a vendor of choice. Our broad product offering positions us particularly well to serve the needs of dental support organizations, or DSOs, which have been one of the fastest growing segments of our customer base. |
• | Global commercial reach. Our operating companies serve more than 1 million dentists in over 150 countries through one of the largest customer-facing sales teams in the dental products industry and through our dealer partners. In 2018, we generated 56% of our sales from markets outside of the U.S. |
• | Strong position in high-growth markets, particularly in the Greater China region. We have successfully grown our business in high-growth markets; these markets represented 23% of our total sales in 2018. We have built one of the largest dental products businesses in the Greater China region, with $213 million of sales in 2018. In that region, we currently have approximately 900 employees (including more than 400 sales personnel), three manufacturing operations and a fully localized infrastructure with dedicated R&D, product management, operations, regulatory affairs, sales and marketing, and customer service resources. |
• | Track record of innovation. With $487 million of cumulative R&D investment in the three years ended December 31, 2018, we have supported our significant market positions in the industry with what we believe is one of the highest levels of R&D investment in the dental products industry. Our focus on innovation has yielded many differentiated products over the years, such as our NobelActiveTM dental implants, our DamonTM passive self-ligating orthodontic wires and brackets, and our i-CATTM 3D imaging system. |
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• | Danaher Business System. We believe our deep-rooted commitment to DBS helps drive our success and market leadership and differentiates us in the dental products industry. DBS encompasses not only lean tools and processes, but also methods for driving growth, innovation and leadership. Within the DBS framework, we pursue a number of ongoing strategic initiatives relating to customer insight generation, product development and commercialization, efficient sourcing, and improvement in manufacturing and back-office support, all with a focus on continually improving quality, delivery, cost, growth and innovation. |
• | Experienced management team with extensive Danaher and dental industry experience. Our management team includes long-tenured leaders from Danaher with a proven track record of applying DBS to execute on our strategic and operational goals. Our executive officer team has extensive dental industry experience and over 50 years of collective service with Danaher. Under their leadership, we have undertaken a significant transformation to better position our business for organic and inorganic growth and diversify our sales globally. |
Our Business Strategy
Our strategy is to maximize shareholder value through several key initiatives:
• | Build upon our strong portfolio of leading brands and commercial scale. We believe the long history and leadership of our well-known brands in the dental products industry enhances our connections with both patients and providers, and supports our strong global market position. We expect to continue our significant investments in expanding our global commercial reach and footprint especially in our direct businesses. We believe these investments better position us to effectively meet the needs of our customers, particularly the growing DSO segment. |
• | Invest in underpenetrated high-growth markets globally. We have succeeded in the Greater China region by harnessing our existing go-to-market infrastructure, building familiarity with local customer needs and regulations, and establishing dedicated locally-based management resources. We expect to continue to invest in the Greater China region as we believe it will be a strong growth driver for our business in the future. We are also replicating key elements of this approach in other high-growth markets such as Latin America, Asia Pacific, Eastern Europe and Russia. |
• | Continue to drive growth in our implants franchise. The dental implant market enjoys higher margins and faster growth than the overall dental products market. In the U.S., which is our largest geographic market, implant penetration lags significantly behind other Western European markets, such as Germany, Spain and Italy. We believe we have an approximately 20% share of the $5 billion global implants segment and will continue to invest in our global commercial footprint and product innovation to grow our strong position in the underpenetrated dental implant market. |
• | Maintain a strong market leadership position through innovation that our customers value. As we seek to continue to improve our business and drive increased cash flow, we expect to strategically invest in innovation in order to better serve our customers. We will focus our new product introductions on driving growth in attractive core segments, such as our upcoming N1 implant system and our new Spark clear aligners and DTX clinical software ecosystem for KaVo’s imaging solutions. |
• | Drive continuous improvement and margin expansion through DBS. We continue to pursue a number of ongoing strategic initiatives across our operating companies relating to efficient sourcing and improvements in manufacturing and back-office support, all with a focus on continually improving quality, delivery, cost, growth and innovation. |
• | Deploy capital through acquisitions and investments. We see many opportunities for capital deployment in our core businesses, as well as in attractive adjacencies. We intend to drive shareholder value by deploying capital to acquire or invest in other businesses that strategically fit into or extend our product offering into new or attractive adjacent markets. |
Risks Associated with the Businesses and the Separation
An investment in our common stock is subject to a number of risks, including risks relating to the separation. The following list of risk factors is not exhaustive. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.
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Risks Related to Our Businesses
• | Conditions in the global economy, the particular markets we serve and the financial markets may adversely affect our business and financial statements. |
• | Significant developments or uncertainties stemming from the U.S. administration, including changes in U.S. trade policies, tariffs and the reaction of other countries thereto, could have an adverse effect on our business. |
• | Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality. |
• | Inventories maintained by our distributors and customers may fluctuate from time to time. |
• | We are dependent upon a limited number of distributors for a significant portion of our sales, and loss of a key distributor could result in a loss of a significant amount of our sales. In addition, adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements. |
• | We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products and services. |
• | Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation. |
• | Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, agents or business partners. |
• | Certain of our businesses are subject to extensive regulation by the United States Food and Drug Administration (“FDA”) and by comparable agencies of other countries, as well as laws regulating fraud and abuse in the health care industry and the privacy and security of health information. Failure to comply with those regulations could adversely affect our reputation, ability to do business and financial statements. |
• | Certain of our products may be subject to clinical trials, the results of which may be unexpected, or perceived as unfavorable by the market, and could have a material adverse effect on our business, financial condition or results of operations. |
• | Off-label marketing of our products could result in substantial penalties. |
• | Certain modifications to our products may require new 510(k) clearances or other marketing authorizations and may require us to recall or cease marketing our products. |
• | The industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce costs, which could adversely affect our financial statements. |
• | Any inability to consummate acquisitions at our historical rate and at appropriate prices, and to make appropriate investments that support our long-term strategy, could negatively impact our growth rate and stock price. |
• | Our acquisition of businesses, investments, joint ventures and other strategic relationships could negatively impact our financial statements. |
• | The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities. |
• | Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we or our predecessors have sold could adversely affect our financial statements. |
• | A significant disruption in, or breach in security of, our information technology systems or data or violation of data privacy laws could adversely affect our business, reputation and financial statements. |
• | Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our business, reputation and financial statements. |
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• | Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our financial statements and our business, including our reputation. |
• | We may be required to recognize impairment charges for our goodwill and other intangible assets. |
• | Foreign currency exchange rates may adversely affect our financial statements. |
• | Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods. |
• | Changes in tax law relating to multinational corporations could adversely affect our tax position. |
• | We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our business and financial statements. |
• | If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights. |
• | Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses or licensing expenses or be prevented from selling products or services. |
• | Defects and unanticipated use or inadequate disclosure with respect to our products or services (including software), or allegations thereof, could adversely affect our business, reputation and financial statements. |
• | The manufacture of many of our products is a highly exacting and complex process, and if we directly or indirectly encounter problems manufacturing products, our reputation, business and financial statements could suffer. |
• | Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations. |
• | If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies. |
• | Our restructuring actions could have long-term adverse effects on our business. |
• | Changes in governmental regulations may reduce demand for our products or services or increase our expenses. |
• | Work stoppages, union and works council campaigns and other labor disputes could adversely impact our productivity and results of operations. |
• | International economic, political, legal, compliance and business factors could negatively affect our financial statements. |
• | Significant developments stemming from the United Kingdom’s referendum on membership in the EU could have an adverse effect on us. |
• | If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed. |
• | Our defined benefit pension plans are subject to financial market risks that could adversely affect our financial statements. |
• | Our ability to attract, develop and retain talented executives and other key employees is critical to our success. |
Risks Related to the Separation and Our Relationship with Danaher
• | We have no history of operating as a separate, publicly-traded company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly-traded company and may not be a reliable indicator of our future results. |
• | As a separate, publicly-traded company, we may not enjoy the same benefits that we did as a part of Danaher. |
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• | The unaudited pro forma combined financial statements included in this prospectus are presented for informational purposes only and may not be an indication of our financial condition or results of operations in the future. |
• | Following the separation and this offering, Danaher will continue to control the direction of our business, and the concentrated ownership of our common stock may prevent you and other stockholders from influencing significant decisions. |
• | The distribution of Danaher’s remaining interest in us may not occur. |
• | If Danaher sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party. |
• | The distribution or future sales by Danaher or others of our common stock, or the perception that the distribution or such sales may occur, could depress our common stock price. |
• | We will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements. |
• | We expect that Danaher and its directors and officers will have limited liability to us or you for breach of fiduciary duty. |
• | Our customers, prospective customers, suppliers or other companies with whom we conduct business may conclude that our financial stability as a separate, publicly-traded company is insufficient to satisfy their requirements for doing or continuing to do business with them. |
• | Potential indemnification liabilities to Danaher pursuant to the separation agreement could materially and adversely affect our businesses, financial condition, results of operations and cash flows. |
• | In connection with our separation from Danaher, Danaher will indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Danaher’s ability to satisfy its indemnification obligation will not be impaired in the future. |
• | If Danaher completes the distribution, and there is later a determination that the separation and/or the distribution is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying the IRS private letter ruling and/or any tax opinion are incorrect or for any other reason, then Danaher and its stockholders could incur significant U.S. federal income tax liabilities, and we could incur significant liabilities. |
• | We may be affected by significant restrictions, including on our ability to engage in certain corporate transactions for a two-year period after the distribution in order to avoid triggering significant tax-related liabilities. |
• | After the separation, certain of our executive officers and directors may have actual or potential conflicts of interest because of their equity interest in Danaher. Also, certain of Danaher’s current executive officers are expected to become our directors, which may create conflicts of interest or the appearance of conflicts of interest. |
• | Danaher may compete with us. |
• | We may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect our businesses. |
• | We may have received better terms from unaffiliated third parties than the terms we will receive in our agreements with Danaher. |
• | We or Danaher may fail to perform under various transaction agreements that will be executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire. |
• | As of the date of this prospectus, we expect to have outstanding indebtedness of approximately $1.5 billion and the ability to incur an additional $250 million of indebtedness under a revolving credit agreement we expect to enter into, and in the future we may incur additional indebtedness. This indebtedness could adversely affect our businesses and our ability to meet our obligations and pay dividends. |
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• | We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful. |
Risks Related to Our Shares of Common Stock and this Offering
• | We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, the trading price of our common stock may fluctuate significantly. |
• | If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected. |
• | The obligations associated with being a public company will require significant resources and management attention. |
• | The market price of shares of our common stock may be volatile, which could cause the value of your investment to decline. |
• | Investors in this offering will experience immediate and substantial dilution. |
• | We cannot guarantee the payment of dividends on our common stock, or the timing or amount of any such dividends. |
• | Your percentage ownership in us may be diluted in the future. |
• | Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock. |
• | Our amended and restated certificate of incorporation will designate the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors, officers, employees and stockholders. |
The Separation and Post-Separation Relationship with Danaher
Immediately prior to the completion of this offering, we will be a wholly-owned subsidiary of Danaher, and all of our outstanding shares of common stock will be owned by Danaher.
Prior to the completion of this offering, we will enter into a separation agreement with Danaher, which is referred to in this prospectus as the “separation agreement.” We will also enter into various other agreements to provide a framework for our relationship with Danaher after the separation, including a transition services agreement, an employee matters agreement, a tax matters agreement, an intellectual property matters agreement, a DBS license agreement and a registration rights agreement. These agreements will provide for the allocation between us and Danaher of Danaher’s assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after the separation and will govern certain relationships between us and Danaher after the separation. For additional information regarding the separation agreement and such other agreements, please refer to sections entitled “Risk Factors—Risks Related to the Separation and Our Relationship with Danaher,” “Certain Relationships and Related Person Transactions” and “The Separation and Distribution Transactions—The Separation.”
Debt Financing Transactions
Prior to the completion of this offering, we intend to (i) enter into a five-year $250 million senior unsecured revolving credit facility with a syndicate of banks, which we refer to as the “credit facility,” and (ii) borrow approximately $1.5 billion pursuant to a term loan agreement we expect to enter into with a syndicate of banks (consisting of a three-year, $750 million senior unsecured term loan facility and a three-year, €675 million senior unsecured term loan facility), which we refer to as the “term loans,” and collectively with the credit facility, as the “debt financing.” As described in the section entitled “Use of Proceeds,” the proceeds from such $1.5 billion of borrowings will be paid to Danaher as partial consideration for Danaher’s transfer of the net assets of its Dental business to us. The debt financing will not be available for borrowings until the date on which certain conditions are satisfied, which we expect will be satisfied prior to the completion of this offering. For additional information regarding the debt financing, please refer to the section entitled “Description of Certain Indebtedness.”
The Distribution
Danaher has informed us that, following this offering, it intends to make a tax-free distribution to its stockholders of all or a portion of its remaining equity interest in us, which may include one or more distributions effected as a dividend to all Danaher
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stockholders, one or more distributions in exchange for Danaher shares or other securities, or any combination thereof. We refer to any such potential distribution as the “distribution.” Danaher has agreed not to effect the distribution for a period of 180 days after the date of this prospectus without the prior written consent of J.P. Morgan Securities LLC. See “Underwriting.”
While, as of the date of this prospectus, Danaher intends to effect the distribution, Danaher has no obligation to pursue or consummate any further dispositions of its ownership interest in us, including through the distribution, by any specified date or at all. If pursued, the distribution may be subject to various conditions, including receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the receipt of a private letter ruling from the Internal Revenue Service, or IRS, and an opinion of counsel to the effect that the separation, together with such distribution, will be tax-free to Danaher and its stockholders for U.S. federal income tax purposes. The conditions to the distribution may not be satisfied, Danaher may decide not to consummate the distribution even if the conditions are satisfied or Danaher may decide to waive one or more of these conditions and consummate the distribution even if all of the conditions are not satisfied. The distribution is not being effected pursuant to this prospectus, and the underwriters of this offering are not acting as underwriters for the distribution.
Upon completion of the distribution, we will no longer qualify as a controlled company and will be required to fully implement corporate governance requirements within one year of the distribution.
Corporate Information
We were incorporated in Delaware on August 29, 2018 for the purpose of holding Danaher’s Dental business in connection with the separation and this offering. Prior to the separation, which is expected to occur immediately prior to completion of this offering, we have had no operations. The address of our principal executive offices is 200 S. Kraemer Blvd., Building E, Brea, CA 92821. Our telephone number is (714) 817-7000.
We maintain an Internet website at www.envistaco.com. Our website, and the information contained therein, or connected thereto, is not incorporated by reference into this prospectus. You should not rely on any such information in making your decision whether to purchase our common stock.
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THE OFFERING
Common stock offered by us in this offering | shares ( shares if the underwriters exercise in full their option to purchase additional shares of our common stock). |
Common stock to be outstanding after this offering | shares ( shares if the underwriters exercise in full their option to purchase additional shares of our common stock). |
Common stock to be held by Danaher immediately after this offering | shares. |
Underwriters’ option to purchase additional shares of common stock | The underwriters have an option to purchase up to additional shares of common stock, as described in “Underwriting.” |
Voting Rights | Shares of common stock are entitled to one vote per share on all matters presented to our stockholders generally. Upon the completion of this offering, Danaher will hold approximately % of the total voting power of our outstanding capital stock, (or % if the underwriters exercise in full their option to purchase additional shares of our common stock). As such, Danaher will have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transactions. See “Security Ownership of Certain Beneficial Owners and Management” and “Description of Capital Stock.” Additionally, upon completion of this offering we will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. See “Management—Controlled Company Exception.” |
Use of proceeds | We estimate that the net proceeds to us from this offering will be approximately $ million, or approximately $ million if the underwriters exercise in full their option to purchase additional shares of our common stock based on an assumed initial public offering price of $ per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We intend to pay to Danaher, as partial consideration for the Dental business Danaher is contributing to us in connection with the separation, all of the net proceeds we will receive from the sale of our common stock in this offering, including any net proceeds we will receive as a result of any exercise of the underwriters’ option to purchase additional shares, and approximately $1.5 billion of proceeds from term debt financing that we will enter into prior to the closing of this offering, as further described in the section entitled “Description of Certain Indebtedness.” |
Dividend Policy | We have not yet determined the extent to which we will pay any dividends on our common stock. The payment of any dividends in the future, and the timing and amount thereof, is within the discretion of the Board. The Board’s decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our future debt, industry practice, legal requirements and other factors that our Board deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if we commence paying dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends. See “Dividend Policy.” |
Listing | We intend to apply to list our shares of common stock on the NYSE under the symbol “NVST.” |
Risk Factors | See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our shares of common stock. |
Directed Share Program | At our request, the underwriters have reserved in aggregate up to 3% of our shares of common stock offered by this prospectus for sale, at the initial public offering price, to certain individuals, including our directors, executive officers and employees, as well as persons with whom we have a business relationship, to the extent permitted under applicable laws and regulations in the United States and in various countries. For additional information regarding the directed share program, please refer to section entitled “Underwriting—Directed Share Program.” |
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Unless the context requires otherwise, references to the number and percentage of shares of our common stock to be outstanding immediately after this offering are based on shares of our common stock outstanding as of , 2019 and assume the underwriters’ option to purchase additional shares will not be exercised.
Unless otherwise indicated, the information presented in this prospectus:
• | gives effect to the transactions described under “The Separation and Distribution Transactions—The Separation;” |
• | gives effect to our amended and restated certificate of incorporation and our amended and restated bylaws, which will be in effect prior to the completion of this offering; |
• | assumes an initial public offering price of $ per share of our common stock, the midpoint of the estimated public offering price range set forth on the cover page of this prospectus; and |
• | excludes shares of our common stock that will be reserved under our equity incentive plan, from which we expect to grant equity awards relating to up to shares of our common stock at or shortly following this offering, as further described in the section entitled “Executive and Director Compensation.” |
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SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following summary financial data reflects the combined assets and results of operations of the Dental segment of Danaher. We derived the summary historical and pro forma combined statement of earnings data for the years ended December 31, 2018, December 31, 2017, and December 31, 2016, and combined balance sheet data as of December 31, 2018 and December 31, 2017, as set forth below, from our audited annual Combined Financial Statements, which are included elsewhere in this prospectus and from our unaudited combined pro forma financial statements included in the “Unaudited Pro Forma Combined Financial Statements” section of this prospectus. Our underlying financial records were derived from the financial records of Danaher for the periods reflected herein. We derived the summary historical and pro forma combined statement of earnings data for the three-month periods ended March 29, 2019 and March 30, 2018 and the combined balance sheet data as of March 29, 2019 from our unaudited Combined Financial Statements included elsewhere in this prospectus. We have prepared the unaudited Combined Financial Statements on the same basis as the audited Combined Financial Statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. Our historical results may not necessarily reflect our results of operations, financial position and cash flows for future periods or what they would have been had we been a separate, publicly-traded company during the periods presented.
We have historically operated as part of Danaher and not as a separate, publicly-traded company. Our Combined Financial Statements have been derived from Danaher’s historical accounting records and are presented on a carve-out basis. All sales and costs as well as assets and liabilities directly associated with our business activity are included as a component of the Combined Financial Statements. The Combined Financial Statements also include allocations of certain general, administrative, sales and marketing expenses and cost of sales from Danaher’s corporate office and from other Danaher businesses to us and allocations of related assets, liabilities, and Danaher’s investment, as applicable. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the Combined Financial Statements had we been an entity that operated separately from Danaher during the periods presented.
The summary unaudited pro forma combined financial data presented has been prepared to reflect the separation and this offering. The summary unaudited pro forma combined condensed financial data has been derived from our unaudited pro forma combined financial statements included elsewhere in this prospectus. The unaudited pro forma combined statement of earnings data presented reflects the financial results as if the separation and this offering occurred on January 1, 2018, which was the first day of fiscal 2018. The unaudited pro forma combined balance sheet data reflects the financial position as if the separation and this offering occurred on March 29, 2019. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information.
The unaudited pro forma combined financial statements are not necessarily indicative of our results of operations or financial condition had the separation and our anticipated post-separation capital structure been completed on the dates assumed. Also, they may not reflect the results of operations or financial condition that would have resulted had we been operating as a separate, publicly-traded company during such periods. In addition, they are not necessarily indicative of our future results of operations, financial position or cash flows.
This summary historical and pro forma combined financial data should be reviewed in combination with “Unaudited Pro Forma Combined Financial Statements,” “Capitalization,” “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Combined Financial Statements and accompanying notes included in this prospectus ($ in millions, except net earnings as a percent of sales and per share data).
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Three-Month Period Ended | Year Ended December 31 | ||||||||||||||||||||||
Pro Forma | Historical | Pro Forma | Historical | ||||||||||||||||||||
March 29, 2019 | March 29, 2019 | March 30, 2018 | 2018 | 2018 | 2017 | 2016 | |||||||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | ||||||||||||||||||||
Summary Statement of Earnings Information: | |||||||||||||||||||||||
Sales | $ | $ | 659.7 | $ | 672.6 | $ | $ | 2,844.5 | $ | 2,810.9 | $ | 2,785.4 | |||||||||||
Cost of sales | (296.6 | ) | (297.1 | ) | (1,242.7 | ) | (1,189.7 | ) | (1,184.3 | ) | |||||||||||||
Gross profit | 363.1 | 375.5 | 1,601.8 | 1,621.2 | 1,601.1 | ||||||||||||||||||
Operating costs: | |||||||||||||||||||||||
Selling, general and administrative expenses | (274.9 | ) | (285.2 | ) | (1,131.4 | ) | (1,062.2 | ) | (1,055.5 | ) | |||||||||||||
Research and development expenses | (43.3 | ) | (41.7 | ) | (172.0 | ) | (172.4 | ) | (142.8 | ) | |||||||||||||
Operating profit | 44.9 | 48.6 | 298.4 | 386.6 | 402.8 | ||||||||||||||||||
Nonoperating income (expense), net: | |||||||||||||||||||||||
Other income (expense), net | 0.1 | 0.2 | 2.7 | 0.1 | (1.1 | ) | |||||||||||||||||
Interest expense | — | — | — | — | — | ||||||||||||||||||
Earnings before income taxes | 45.0 | 48.8 | 301.1 | 386.7 | 401.7 | ||||||||||||||||||
Income taxes | (7.1 | ) | (12.2 | ) | (70.4 | ) | (85.6 | ) | (129.7 | ) | |||||||||||||
Net earnings | $ | $ | 37.9 | $ | 36.6 | $ | $ | 230.7 | $ | 301.1 | $ | 272.0 | |||||||||||
Net earnings as a percent of sales | 6 | % | 5 | % | 8 | % | 11 | % | 10 | % | |||||||||||||
Net earnings per share: | |||||||||||||||||||||||
Basic | $ | $ | |||||||||||||||||||||
Diluted | $ | $ | |||||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Diluted | |||||||||||||||||||||||
Summary Statement of Cash Flows Information: | |||||||||||||||||||||||
Net cash (used in) provided by: | |||||||||||||||||||||||
Operating activities | $ | $ | (9.0 | ) | $ | 27.9 | $ | $ | 400.1 | $ | 359.1 | $ | 417.0 | ||||||||||
Investing activities | (15.3 | ) | (13.0 | ) | (75.5 | ) | (54.9 | ) | (59.4 | ) | |||||||||||||
Financing activities | 24.3 | (14.9 | ) | (324.6 | ) | (304.2 | ) | (357.6 | ) | ||||||||||||||
Capital expenditures | (15.6 | ) | (13.0 | ) | (72.2 | ) | (48.9 | ) | (49.1 | ) | |||||||||||||
Other Data (Non-GAAP): | |||||||||||||||||||||||
Adjusted Net Earnings (1) | $ | $ | 53.3 | $ | 62.4 | $ | $ | 343.8 | $ | 328.8 | $ | 342.8 | |||||||||||
Adjusted EBITDA (1) | 79.3 | 91.7 | 490.8 | 533.5 | 563.3 | ||||||||||||||||||
Free Cash Flow (1) | (24.3 | ) | 14.9 | 327.9 | 310.3 | 368.8 | |||||||||||||||||
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As of March 29, 2019 | As of December 31 | ||||||||||||
Pro Forma | Historical | Historical | |||||||||||
(unaudited) | (unaudited) | 2018 | 2017 | ||||||||||
Summary Balance Sheet Information: | |||||||||||||
Current assets | $ | $ | 798.8 | $ | 786.8 | $ | 794.5 | ||||||
Current liabilities | 600.3 | 641.0 | 628.2 | ||||||||||
Property, plant and equipment, net | 263.2 | 261.6 | 231.2 | ||||||||||
Total assets | 5,981.6 | 5,841.6 | 5,992.8 | ||||||||||
Total liabilities | 1,126.7 | 1,015.2 | 998.2 | ||||||||||
Long-term debt | — | — | — | ||||||||||
Total equity | 4,854.9 | 4,826.4 | 4,994.6 | ||||||||||
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(1) Non-GAAP financial measures
Adjusted Net Earnings, Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures that we use to measure the performance of our business. The tables below reconcile these non-GAAP measures to the nearest financial measure that is in accordance with accounting principles generally accepted in the United States (“GAAP”) for the periods presented.
Adjusted Net Earnings
• | Adjusted Net Earnings is defined as GAAP net earnings adjusted to exclude amortization, accruals for significant legal matters, restructuring costs and asset impairments, a gain related to settlement of liabilities in connection with a noncontrolling interest, the tax effect of all adjustments and discrete tax adjustments and other tax-related adjustments. |
• | The table below is a reconciliation of GAAP net earnings to Adjusted Net Earnings for the three-month periods ended March 29, 2019 and March 30, 2018 and the years ended December 31, 2018, 2017 and 2016: |
Three-Month Period Ended | Year Ended December 31 | ||||||||||||||||||||||
Pro Forma | Historical | Pro Forma | Historical | ||||||||||||||||||||
March 29, 2019 | March 29, 2019 | March 30, 2018 | 2018 | 2018 | 2017 | 2016 | |||||||||||||||||
($ in millions) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||
Reported Net Earnings (GAAP) | $ | $ | 37.9 | $ | 36.6 | $ | $ | 230.7 | $ | 301.1 | $ | 272.0 | |||||||||||
Amortization | 22.5 | 22.9 | 90.6 | 81.7 | 83.4 | ||||||||||||||||||
Accruals for significant legal matters | — | — | 36.0 | — | — | ||||||||||||||||||
Restructuring costs and asset impairments (a) | 2.0 | 10.1 | 23.7 | 35.8 | 34.4 | ||||||||||||||||||
Settlement of liabilities in connection with noncontrolling interest (b) | — | — | — | (10.4 | ) | — | |||||||||||||||||
Tax effect of all adjustments reflected above (c) | (6.1 | ) | (8.2 | ) | (35.4 | ) | (44.6 | ) | (44.8 | ) | |||||||||||||
Discrete tax adjustments and other tax-related adjustments (d) | (3.0 | ) | 1.0 | (1.8 | ) | (34.8 | ) | (2.2 | ) | ||||||||||||||
Adjusted Net Earnings (Non-GAAP) | $ | $ | 53.3 | $ | 62.4 | $ | $ | 343.8 | $ | 328.8 | $ | 342.8 | |||||||||||
(a) | Refer to Note 12 to our audited Combined Financial Statements. |
(b) | Refer to Note 4 to our audited Combined Financial Statements. |
(c) | This line item reflects the aggregate tax effect of all nontax adjustments reflected in the preceding line items of the table. We estimate the tax effect of each adjustment item by applying the statutory U.S. tax rate to the pretax amount, unless the nature of the item and/or the tax jurisdiction in which the item has been recorded requires application of a specific tax rate or tax treatment, in which case the tax effect of such item is estimated by applying such specific tax rate or tax treatment. |
(d) | Discrete tax adjustments and other tax-related adjustments include the impact of net discrete tax charges related primarily to changes in estimates associated with prior period uncertain tax positions and audit settlements, net of the release of valuation allowances associated with certain foreign tax credits and tax benefits resulting from a change in law and excess tax benefits from stock-based compensation realized in excess of anticipated levels in the respective period. |
For the year ended December 31, 2017, the $34.8 million adjustment represents (1) a tax benefit of $37.4 million related to enactment of the Tax Cuts and Jobs Act (of which a tax benefit of $73.4 million is related to the remeasurement of deferred tax assets and liabilities, net, and a tax charge of $36.0 million is related to the transition tax on deemed repatriation of foreign earnings) and (2) a tax charge of $2.6 million relates to other discrete income tax gains, primarily related to expiration of statute of limitations.
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Adjusted EBITDA
• | Adjusted EBITDA is defined as GAAP net earnings adjusted to exclude interest expense, income taxes, depreciation and amortization, accruals for significant legal matters, restructuring costs and asset impairments and a gain related to settlement of liabilities in connection with a noncontrolling interest. |
• | The table below is a reconciliation of GAAP net earnings to Adjusted EBITDA for the three-month periods ended March 29, 2019 and March 30, 2018 and the years ended December 31, 2018, 2017 and 2016: |
Three-Month Period Ended | Year Ended December 31 | ||||||||||||||||||||||
Pro Forma | Historical | Pro Forma | Historical | ||||||||||||||||||||
March 29, 2019 | March 29, 2019 | March 30, 2018 | 2018 | 2018 | 2017 | 2016 | |||||||||||||||||
($ in millions) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||
Reported Net Earnings (GAAP) | $ | $ | 37.9 | $ | 36.6 | $ | $ | 230.7 | $ | 301.1 | $ | 272.0 | |||||||||||
Interest expense | — | — | — | — | — | ||||||||||||||||||
Income taxes | 7.1 | 12.2 | 70.4 | 85.6 | 129.7 | ||||||||||||||||||
Depreciation | 9.8 | 9.9 | 39.4 | 39.7 | 43.8 | ||||||||||||||||||
Amortization | 22.5 | 22.9 | 90.6 | 81.7 | 83.4 | ||||||||||||||||||
EBITDA (Non-GAAP) | 77.3 | 81.6 | 431.1 | 508.1 | 528.9 | ||||||||||||||||||
Accruals for significant legal matters | — | — | 36.0 | — | — | ||||||||||||||||||
Restructuring costs and asset impairments (a) | 2.0 | 10.1 | 23.7 | 35.8 | 34.4 | ||||||||||||||||||
Settlement of liabilities in connection with noncontrolling interest (b) | — | — | — | (10.4 | ) | — | |||||||||||||||||
Adjusted EBITDA (Non-GAAP) | $ | $ | 79.3 | $ | 91.7 | $ | $ | 490.8 | $ | 533.5 | $ | 563.3 | |||||||||||
(a) | Refer to Note 12 to our audited Combined Financial Statements. |
(b) | Refer to Note 4 to our audited Combined Financial Statements. |
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Free Cash Flow
• | We define Free Cash Flow as net cash (used in) provided by operating activities less payments for additions to property, plant and equipment (“capital expenditures”), plus proceeds from sales of property, plant and equipment (“capital disposals”). |
• | The table below is a reconciliation of GAAP net cash (used in) provided by operating activities to Free Cash Flow for the three-month periods ended March 29, 2019 and March 30, 2018 and the years ended December 31, 2018, 2017 and 2016: |
Three-Month Period Ended | Year Ended December 31 | ||||||||||||||||||||||
Pro Forma | Historical | Pro Forma | Historical | ||||||||||||||||||||
March 29, 2019 | March 29, 2019 | March 30, 2018 | 2018 | 2018 | 2017 | 2016 | |||||||||||||||||
($ in millions) | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||
Net cash used in investing activities (GAAP) | $ | $ | (15.3 | ) | $ | (13.0 | ) | $ | $ | (75.5 | ) | $ | (54.9 | ) | $ | (59.4 | ) | ||||||
Net cash provided by (used in) financing activities (GAAP) | 24.3 | (14.9 | ) | (324.6 | ) | (304.2 | ) | (357.6 | ) | ||||||||||||||
Net cash (used in) provided by operating activities (GAAP) | $ | $ | (9.0 | ) | $ | 27.9 | $ | $ | 400.1 | $ | 359.1 | $ | 417.0 | ||||||||||
Less: payments for additions to property, plant & equipment (capital expenditures) (GAAP) | (15.6 | ) | (13.0 | ) | (72.2 | ) | (48.9 | ) | (49.1 | ) | |||||||||||||
Plus: proceeds from sales of property, plant & equipment (capital disposals) (GAAP) | 0.3 | — | — | 0.1 | 0.9 | ||||||||||||||||||
Free Cash Flow (Non-GAAP) | $ | $ | (24.3 | ) | $ | 14.9 | $ | $ | 327.9 | $ | 310.3 | $ | 368.8 | ||||||||||
Statement Regarding Non-GAAP Measures
Each of the non-GAAP measures set forth above, along with core sales (referred to in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”) should be considered in addition to, and not as a replacement for or superior to, the comparable GAAP measure, and may not be comparable to similarly titled measures reported by other companies. Management believes that these measures provide useful information to investors by offering additional ways of viewing our results that, when reconciled to the corresponding GAAP measure, help our investors to:
• | with respect to Adjusted Net Earnings and Adjusted EBITDA, understand the long-term profitability trends of our business and compare our profitability to prior and future periods and to our peers; |
• | with respect to core sales (referred to in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), identify underlying growth trends in our business and compare our revenue performance with prior and future periods and to our peers; and |
• | with respect to Free Cash Flow (the “FCF Measure”), understand our ability to generate cash without external financings, strengthen our balance sheet, invest in our business and grow our business through acquisitions and other strategic opportunities (although a limitation of Free Cash Flow is that it does not take into account any debt service requirements or other non-discretionary expenditures, and as a result the entire free cash flow amount is not necessarily available for discretionary expenditures). |
Management also uses these non-GAAP measures to measure our operating and financial performance.
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The items excluded from the non-GAAP measures set forth above have been excluded for the following reasons:
• | With respect to Adjusted Net Earnings and Adjusted EBITDA: |
◦ | We exclude the amortization of acquisition-related intangible assets because the amount and timing of such charges are significantly impacted by the timing, size, number and nature of the acquisitions we consummate. While we have a history of significant acquisition activity we do not acquire businesses on a predictable cycle, and the amount of an acquisition’s purchase price allocated to intangible assets and related amortization term are unique to each acquisition and can vary significantly from acquisition to acquisition. Exclusion of this amortization expense facilitates more consistent comparisons of operating results over time between our newly acquired and long-held businesses, and with both acquisitive and non-acquisitive peer companies. We believe however that it is important for investors to understand that such intangible assets contribute to revenue generation and that intangible asset amortization related to past acquisitions will recur in future periods until such intangible assets have been fully amortized. |
◦ | We exclude costs incurred pursuant to discrete restructuring plans that are fundamentally different (in terms of the size, strategic nature and planning requirements, as well as the inconsistent frequency, of such plans) from the ongoing productivity improvements that result from application of the Danaher Business System. Because these restructuring plans are incremental to the core activities that arise in the ordinary course of our business and we believe are not indicative of our ongoing operating costs in a given period, we exclude these costs from the calculation of Adjusted Net Earnings and Adjusted EBITDA to facilitate a more consistent comparison of operating results over time. |
◦ | With respect to the other items excluded from Adjusted Net Earnings and Adjusted EBITDA, we exclude these items because they are of a nature and/or size that occur with inconsistent frequency, occur for reasons that may be unrelated to the Company’s commercial performance during the period and/or we believe that such items may obscure underlying business trends and make comparisons of long-term performance difficult. |
• | With respect to core sales, (1) we exclude the impact of currency translation because it is not under management’s control, is subject to volatility and can obscure underlying business trends, and (2) we exclude the effect of acquisitions and divested product lines because the timing, size, number and nature of such transactions can vary significantly from period-to-period and between us and our peers, which we believe may obscure underlying business trends and make comparisons of long-term performance difficult. |
• | With respect to the FCF Measure, we exclude payments for additions to property, plant and equipment (net of the proceeds from capital disposals) to demonstrate the amount of operating cash flow for the period that remains after accounting for our capital expenditure requirements. |
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RISK FACTORS
You should carefully consider the risks and uncertainties described below, together with the information included elsewhere in this prospectus. The risks and uncertainties described below are those that we have identified as material, but are not the only risks and uncertainties facing us. Our business is also subject to general risks and uncertainties that affect many other companies, such as market conditions, economic conditions, geopolitical events, changes in laws, regulations or accounting rules, fluctuations in interest rates, terrorism, wars or conflicts, major health concerns, natural disasters or other disruptions of expected business conditions. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial also may impair our business, including our results of operations, liquidity and financial condition.
Risks Related to Our Businesses
Conditions in the global economy, the particular markets we serve and the financial markets may adversely affect our business and financial statements.
Our business is sensitive to general economic conditions. Slower global economic growth, actual or anticipated default on sovereign debt, volatility in the currency and credit markets, high levels of unemployment or underemployment, reduced levels of capital expenditures, changes or anticipation of potential changes in government trade, fiscal, tax and monetary policies, changes in capital requirements for financial institutions, government deficit reduction and budget negotiation dynamics, sequestration, austerity measures and other challenges that affect the global economy may adversely affect us and our distributors, customers and suppliers. Our success also depends upon the continued strength of the markets we serve. In many markets, dental reimbursement is 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 susceptible to changes in economic conditions. The above factors can have the effect of:
• | reducing demand for our products and services (in this prospectus, references to products and services also includes software), limiting the financing available to our customers and suppliers, increasing order cancellations and resulting in longer sales cycles and slower adoption of new technologies; |
• | increasing the difficulty in collecting accounts receivable and the risk of excess and obsolete inventories; |
• | increasing price competition in our served markets; |
• | supply interruptions, which could disrupt our ability to produce our products; |
• | increasing the risk of impairment of goodwill and other long-lived assets, and the risk that we may not be able to fully recover the value of other assets such as real estate and tax assets; |
• | increasing the risk that counterparties to our contractual arrangements will become insolvent or otherwise unable to fulfill their contractual obligations which, in addition to increasing the risks identified above, could result in preference actions against us; and |
• | adversely impacting market sizes. |
There can be no assurances that the capital markets will be available to us or that the lenders participating in any credit facilities we may enter into will be able to provide financing in accordance with their contractual obligations. If growth in the global economy or in any of the markets we serve slows for a significant period, if there is significant deterioration in the global economy or such markets or if improvements in the global economy do not benefit the markets we serve, our business and financial statements could be adversely affected.
Significant developments or uncertainties stemming from the U.S. administration, including changes in U.S. trade policies, tariffs and the reaction of other countries thereto, could have an adverse effect on our business.
Changes, potential changes or uncertainties in U.S. social, political, regulatory and economic conditions or laws and policies governing foreign trade, the health care system, manufacturing, and development and investment in the territories and countries where we or our customers operate, stemming from the U.S. administration, could adversely affect our business and financial statements. For example, the U.S. administration has increased tariffs on certain goods imported into the United States, raised the possibility of imposing significant, additional tariff increases and called for substantial changes to trade agreements. In particular, trade tensions between the United States and China have been escalating in recent months. China accounted for approximately 7% of our sales in 2018. These factors have adversely affected, and in the future could further adversely affect, our operating results and our business.
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Our growth could suffer if the markets into which we sell our products and services decline, do not grow as anticipated or experience cyclicality.
Our growth depends in part on the growth of the markets which we serve, and visibility into our markets is limited (particularly for markets into which we sell through distribution). Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which would adversely affect our financial statements. Our quarterly sales and profits depend substantially on the volume and timing of orders received during the fiscal quarter, which are difficult to forecast. Certain of our businesses operate in industries that may also experience periodic, cyclical downturns.
In addition, in certain of our businesses, demand depends on customers’ capital spending budgets as well as government funding policies, and matters of public policy and government budget dynamics as well as product and economic cycles can affect the spending decisions of these entities. Demand for our products and services is also sensitive to changes in customer order patterns, which may be affected by announced price changes, marketing or promotional programs, new product introductions, the timing of industry trade shows and changes in distributor or customer inventory levels due to distributor or customer management thereof or other factors. Any of these factors could adversely affect our growth and results of operations in any given period.
Inventories maintained by our distributors and customers may fluctuate from time to time.
We rely in part on our distributor and customer relationships and predictions of distributor and customer inventory levels in projecting future demand levels and financial results. These inventory levels may fluctuate, and may differ from our predictions, resulting in our projections of future results being different than expected. These changes may be influenced by changing relationships with the distributor and customers, economic conditions and end-user preference for particular products. There can be no assurance that our distributors and customers will maintain levels of inventory in accordance with our predictions or past history, or that the timing of distributors’ or customers’ inventory build or liquidation will be in accordance with our predictions or past history.
We are dependent upon a limited number of distributors for a significant portion of our sales, and loss of a key distributor could result in a loss of a significant amount of our sales. In addition, adverse changes in our relationships with, or the financial condition, performance, purchasing patterns or inventory levels of, key distributors and other channel partners could adversely affect our financial statements.
Historically, a substantial portion of our sales had come from a limited number of distributors, particularly Henry Schein, Inc. (“Henry Schein”), which accounted for approximately 14% of our sales in 2018. It is anticipated that Henry Schein will continue to be the largest contributor to our sales for the foreseeable future. By its terms, our master distribution agreement with Henry Schein, which covers distribution of KaVo Kerr products in the U.S. and Canada, is currently scheduled to expire on December 31, 2019, unless the parties mutually agree to extend the agreement. There can be no assurance that Henry Schein or any particular distributor will purchase any particular quantity of products from us or continue to purchase any products at all. If Henry Schein or any other significant distributor significantly reduces the volume of products purchased from us, it would have an adverse effect on our financial statements.
Our key distributors and other channel partners typically have valuable relationships with customers and end-users. Some of these distributors and other partners also sell our competitors’ products or compete with us directly, and if they favor competing products for any reason they may fail to market our products effectively. Adverse changes in our relationships with these distributors and other partners, reduction or discontinuation of their purchases from us or adverse developments in their financial condition, performance or purchasing patterns, could adversely affect our business and financial statements. The levels of inventory maintained by our distributors and other channel partners, and changes in those levels, can also significantly impact our results of operations in any given period. In addition, the consolidation of distributors and customers in certain of our served industries could adversely impact our business and financial statements.
We face intense competition and if we are unable to compete effectively, we may experience decreased demand and decreased market share. Even if we compete effectively, we may be required to reduce prices for our products and services.
Our businesses operate in industries that are intensely competitive and have been subject to increasing consolidation. Because of the range of the products and services we sell and the variety of markets we serve, we encounter a wide variety of competitors. See “Business—Competition.” In order to compete effectively, we must retain longstanding relationships with major customers and continue to grow our business by establishing relationships with new customers, continually developing new products and services to maintain and expand our brand recognition and leadership position in various product and service categories and penetrating new markets, including high-growth markets. In addition, significant shifts in industry market share have occurred and may in the future occur in connection with product problems, safety alerts and publications about products, reflecting the competitive significance of product quality, product efficacy and quality systems in our industry. Our failure to
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compete effectively and/or pricing pressures resulting from competition may adversely impact our financial statements, and our expansion into new markets may result in greater-than-expected risks, liabilities and expenses. In addition, we are exposed to the risk that our competitors or our customers may introduce private label, generic, or low-cost products that compete with our products at lower price points. If these competitors’ products capture significant market share or result in a decrease in market prices overall, this could have an adverse effect on our financial statements.
Our growth depends in part on the timely development and commercialization, and customer acceptance, of new and enhanced products and services based on technological innovation.
We generally sell our products and services in an industry that is characterized by rapid technological changes, frequent new product introductions and changing industry standards. If we do not develop innovative new and enhanced products and services on a timely basis, our offerings will become obsolete over time and our competitive position and financial statements will suffer. Our success will depend on several factors, including our ability to:
• | correctly identify customer needs and preferences and predict future needs and preferences; |
• | allocate our research and development funding to products and services with higher growth prospects; |
• | anticipate and respond to our competitors’ development of new products and services and technological innovations; |
• | differentiate our offerings from our competitors’ offerings and avoid commoditization; |
• | innovate and develop new technologies and applications, and acquire or obtain rights to third-party technologies that may have valuable applications in our served markets; |
• | obtain adequate intellectual property rights with respect to key technologies before our competitors do; |
• | successfully commercialize new technologies in a timely manner, price them competitively and cost-effectively manufacture and deliver sufficient volumes of new products of appropriate quality on time; |
• | obtain necessary regulatory approvals of appropriate scope (including by demonstrating satisfactory clinical results where required); and |
• | stimulate customer demand for and convince customers to adopt new technologies. |
If we fail to accurately predict future customer needs and preferences or fail to produce viable technologies, we may invest heavily in research and development of products and services that do not lead to significant sales, which would adversely affect our profitability.
Even if we successfully innovate and develop new and enhanced products and services, we may incur substantial costs in doing so, and our profitability may suffer. In addition, promising new offerings may fail to reach the market or realize only limited commercial success because of real or perceived efficacy or safety concerns, failure to achieve positive clinical outcomes, uncertainty over third-party reimbursement or entrenched patterns of clinical practice. For additional information on third-party reimbursement of dental products, please refer to the section entitled “Business—Regulatory Matters.”
Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, agents or business partners.
We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, employment practices and workplace behavior, export and import compliance, economic and trade sanctions, money laundering and data privacy. In particular, the U.S. Foreign Corrupt Practices Act, the UK Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced governmental corruption to some degree. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the U.S. and in other jurisdictions and related stockholder lawsuits, could lead to substantial civil and criminal, monetary and non-monetary penalties and could cause us to incur significant legal and investigatory fees. In addition, the government may seek to hold us liable for violations committed by companies in which we invest or that we acquire. We also rely on our suppliers to adhere to our supplier standards of conduct, and material violations of such standards of conduct could occur that could have a material effect on our business, reputation and financial statements.
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Certain of our businesses are subject to extensive regulation by the FDA and by comparable agencies of other countries, as well as laws regulating fraud and abuse in the health care industry and the privacy and security of health information. Failure to comply with those regulations could adversely affect our reputation, ability to do business and financial statements.
Most of our products are medical devices subject to regulation by the FDA, by other federal and state governmental agencies, by comparable agencies of other countries and regions, by certain accrediting bodies and by regulations governing hazardous materials (or the manufacture and sale of products containing any such materials). The FDA and these other regulatory authorities enforce additional regulations regarding the safety of X-ray emitting devices. The global regulatory environment has become increasingly stringent and unpredictable. Several countries that did not have regulatory requirements for medical devices have established such requirements in recent years, and other countries have expanded, or plan to expand, their existing regulations. For example, the EU has adopted the EU Medical Device Regulation (the “EU MDR”) which imposes stricter requirements for the marketing and sale of medical devices, including in the area of clinical evaluation requirements, quality systems and post-market surveillance. Manufacturers of currently approved medical devices will have until May 2020 to meet the requirements of the EU MDR. Failure to meet these requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements.
To varying degrees, these regulators require us to comply with laws and regulations governing the development, testing, manufacturing, labeling, marketing, distribution and post-marketing surveillance of our products. We cannot guarantee that we will be able to obtain regulatory clearance (such as 510(k) clearance) or approvals for our new products or modifications to (or additional indications or uses of) existing products within our anticipated timeframe or at all, and if we do obtain such clearance or approval it may be time-consuming, costly and subject to restrictions. Our ability to obtain such regulatory clearances or approvals will depend on many factors and the process for obtaining such clearances or approvals could change over time. Even after initial regulatory clearance or approval, we are subject to periodic inspection by these regulatory authorities, and if safety issues arise we may be required to amend conditions for use of a product, such as providing additional warnings on the product’s label or narrowing its approved intended use, which could reduce the product’s market acceptance. Failure to obtain required regulatory clearances or approvals before marketing our products (or before implementing modifications to or promoting additional indications or uses of our products), other violations of these regulations, failure to remediate inspectional observations to the satisfaction of these regulatory authorities and real or perceived efficacy or safety concerns or trends of adverse events with respect to our products (even after obtaining clearance for distribution) can lead to FDA Form 483 Inspectional Observations, warning letters, notices to customers, declining sales, loss of customers, loss of market share, remediation and increased compliance costs, recalls, seizures of adulterated or misbranded products, injunctions, administrative detentions, refusals to permit importations, partial or total shutdown of production facilities or the implementation of operating restrictions, narrowing of permitted uses for a product, suspension or withdrawal of approvals and pre-market notification rescissions. We are also subject to various laws regulating fraud and abuse, pricing and sales and marketing practices in the health care industry and the privacy and security of health information as well as manufacturing and quality standards, including the federal regulations described in the section entitled “Business—Regulatory Matters.” Ensuring that our internal operations and business arrangements with third parties comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that government authorities will conclude that our business practices do not comply with current or future statutes, regulations, agency guidance or case law involving applicable fraud and abuse or other healthcare laws and regulations.
Noncompliance with these standards can result in, among other things, fines, expenses, injunctions, civil penalties, recalls or seizures of products, total or partial suspension of production, refusal of the government to grant 510(k) clearance of devices, withdrawal of marketing approvals, criminal prosecutions and other adverse effects referenced below under “Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our financial statements and our business, including our reputation.” Further, defending against any such actions can be costly and time-consuming and may require significant personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired.
Certain of our products may be subject to clinical trials, the results of which may be unexpected, or perceived as unfavorable by the market, and could have a material adverse effect on our business, financial condition or results of operations.
As a part of the regulatory process of obtaining marketing clearance for new products and new indications for existing products, we may conduct and participate in clinical trials. Unexpected or inconsistent clinical data from existing or future clinical trials, or a regulator’s or the market’s perception of this clinical data, may adversely impact our ability to obtain product approvals, our position in, and share of, the markets in which we participate and our business and financial statements.
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Off-label marketing of our products could result in substantial penalties.
The FDA strictly regulates the promotional claims that may be made about approved or cleared products. In particular, any clearances we may receive only permit us to market our products for the uses indicated on the labeling cleared by the FDA. We may request additional label indications for our current products, and the FDA may deny those requests outright, require additional expensive performance or clinical data to support any additional indications or impose limitations on the intended use of any cleared products as a condition of clearance. If the FDA determines that we have marketed our products for off-label use, we could be subject to fines, injunctions or other penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, substantial monetary penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, and/or the curtailment of our operations. Any of these events could significantly harm our business and results of operations and cause our stock price to decline.
Certain modifications to our products may require new 510(k) clearances or other marketing authorizations and may require us to recall or cease marketing our products.
Once a medical device is permitted to be legally marketed in the U.S. pursuant to a 510(k) clearance, a manufacturer may be required to notify the FDA of certain modifications to the device. Manufacturers determine in the first instance whether a change to a product requires a new premarket submission, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances are necessary. We have made modifications to our products in the past and have determined based on our review of the applicable FDA regulations and guidance that in certain instances new 510(k) clearances or other premarket submissions were not required. We may make similar modifications or add additional features in the future that we believe do not require a new 510(k) clearance. If the FDA disagrees with our determinations and requires us to submit new 510(k) notifications, we may be required to cease marketing or to recall the modified product until we obtain clearance, and we may be subject to significant regulatory fines or penalties.
The industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce costs, which could adversely affect our financial statements.
The industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce costs, including the following:
• | Governmental and private health care providers and payors around the world are increasingly utilizing managed care for the delivery of health care services, centralizing purchasing, limiting the number of vendors that may participate in purchasing programs, forming group purchasing organizations and integrated health delivery networks and pursuing consolidation to improve their purchasing leverage and using competitive bid processes to procure health care products and services. |
• | Certain of our customers, and the end-users to whom our customers supply products, rely on government funding of and reimbursement for health care products and services and research activities. The U.S. Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”), health care austerity measures in other countries and other potential health care reform changes and government austerity measures have reduced and may further reduce the amount of government funding or reimbursement available to customers or end-users of our products and services and/or the volume of medical procedures using our products and services. 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. Global economic uncertainty or deterioration can also adversely impact government funding and reimbursement. |
• | The PPACA imposes on medical device manufacturers, such as us, a 2.3% excise tax on U.S. sales of certain medical devices. The excise tax has been suspended until the end of 2019, but we would be subject to the tax beginning in 2020. |
These changes as well as other impacts from market demand, government regulations, third-party coverage and reimbursement policies and societal pressures have started changing the way health care is delivered, reimbursed and funded and may cause participants in the health care industry and related industries that we serve to purchase fewer of our products and services, reduce the prices they are willing to pay for our products or services, reduce the amounts of reimbursement and funding available for our products and services from governmental agencies or third-party payors, heighten clinical data requirements, reduce the volume of medical procedures that use our products and services, affect the acceptance rate of new technologies and products and increase our compliance and other costs. In addition, we may be excluded from important market segments or
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unable to enter into contracts with group purchasing organizations and integrated health networks on terms acceptable to us, and even if we do enter into such contracts they may be on terms that negatively affect our current or future profitability. All of the factors described above could adversely affect our business and financial statements.
Any inability to consummate acquisitions at our historical rate and at appropriate prices, and to make appropriate investments that support our long-term strategy, could negatively impact our growth rate and stock price.
Our ability to grow sales, earnings and cash flow at or above our historic rates depends in part upon our ability to identify and successfully acquire and integrate businesses at appropriate prices and realize anticipated synergies, and to make appropriate investments that support our long-term strategy. We may not be able to consummate acquisitions at rates similar to the past, which could adversely impact our growth rate and our stock price. Promising acquisitions and investments are difficult to identify and complete for a number of reasons, including high valuations, competition among prospective buyers, the availability of affordable funding in the capital markets and the need to satisfy applicable closing conditions and obtain applicable antitrust and other regulatory approvals on acceptable terms. In addition, competition for acquisitions and investment may result in higher purchase prices. Changes in accounting or regulatory requirements or instability in the credit markets could also adversely impact our ability to consummate acquisitions and investments.
Our acquisition of businesses, investments, joint ventures and other strategic relationships could negatively impact our financial statements.
As part of our business strategy we acquire businesses, make investments and enter into joint ventures and other strategic relationships in the ordinary course; please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional details. Acquisitions, investments, joint ventures and strategic relationships involve a number of financial, accounting, managerial, operational, legal, compliance and other risks and challenges, including the following, any of which could adversely affect our business and our financial statements:
• | Any business, technology, service or product that we acquire or invest in could under-perform relative to our expectations and the price that we paid or not perform in accordance with our anticipated timetable, or we could fail to operate any such business profitably. |
• | We may incur or assume significant debt in connection with our acquisitions, investments, joint ventures or strategic relationships, which could also cause a deterioration of our credit ratings, result in increased borrowing costs and interest expense and diminish our future access to the capital markets. |
• | Acquisitions, investments, joint ventures or strategic relationships could cause our financial results to differ from our own or the investment community’s expectations in any given period, or over the long-term. |
• | Pre-closing and post-closing earnings charges could adversely impact operating results in any given period, and the impact may be substantially different from period to period. |
• | Acquisitions, investments, joint ventures or strategic relationships could create demands on our management, operational resources and financial and internal control systems that we are unable to effectively address. |
• | We could experience difficulty in integrating personnel, operations and financial and other controls and systems and retaining key employees and customers. |
• | We may be unable to achieve cost savings or other synergies anticipated in connection with an acquisition, investment, joint venture or strategic relationship. |
• | We may assume unknown liabilities, known contingent liabilities that become realized, known liabilities that prove greater than anticipated, internal control deficiencies or exposure to regulatory sanctions resulting from the acquired company’s or investee’s activities and the realization of any of these liabilities or deficiencies may increase our expenses, adversely affect our financial position or cause us to fail to meet our public financial reporting obligations. |
• | In connection with acquisitions and joint ventures, we often enter into post-closing financial arrangements such as purchase price adjustments, earn-out obligations and indemnification obligations, which may have unpredictable financial results. |
• | As a result of our acquisitions and investments, we have recorded significant goodwill and other assets on our balance sheet and if we are not able to realize the value of these assets, or if the fair value of our investments declines, we may be required to incur impairment charges. |
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• | We may have interests that diverge from those of our joint venture partners or other strategic partners and we may not be able to direct the management and operations of the joint venture or other strategic relationship in the manner we believe is most appropriate, exposing us to additional risk. |
• | Investing in or making loans to early-stage companies often entails a high degree of risk, and we may not achieve the strategic, technological, financial or commercial benefits we anticipate; we may lose our investment or fail to recoup our loan; or our investment may be illiquid for a greater-than-expected period of time. |
The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.
Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the acquired company before we acquired it. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We cannot assure you that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that adversely affect our financial statements.
Divestitures or other dispositions could negatively impact our business, and contingent liabilities from businesses that we or our predecessors have sold could adversely affect our financial statements.
We continually assess the strategic fit of our existing businesses and may divest, spin-off, split-off or otherwise dispose of businesses that are deemed not to fit with our strategic plan or are not achieving the desired return on investment. These transactions pose risks and challenges that could negatively impact our business and financial statements. For example, when we decide to sell or otherwise dispose of a business or assets, we may be unable to do so on satisfactory terms within our anticipated timeframe or at all, and even after reaching a definitive agreement to sell or dispose a business the sale is typically subject to satisfaction of pre-closing conditions which may not become satisfied. In addition, divestitures or other dispositions may dilute our earnings per share, have other adverse tax, financial and accounting impacts and distract management, and disputes may arise with buyers. In addition, we have retained responsibility for and/or have agreed to indemnify buyers against some known and unknown contingent liabilities related to certain businesses or assets we or our predecessors have sold or disposed. The resolution of these contingencies has not had a material effect on our financial statements but we cannot be certain that this favorable pattern will continue.
A significant disruption in, or breach in security of, our information technology systems or data or violation of data privacy laws could adversely affect our business, reputation and financial statements.
We rely on information technology systems, some of which are provided and/or managed by third parties, to process, transmit and store electronic information (including sensitive data such as confidential business information and personal data relating to employees, customers, other business partners and patients), and to manage or support a variety of critical business processes and activities (such as receiving and fulfilling orders, billing, collecting and making payments, shipping products, providing services and support to customers and fulfilling contractual obligations). In addition, some of our software products and services incorporate information technology that may house personal data and some products or software we sell to customers may connect to our systems for maintenance or other purposes. These systems, products and services (including those we acquire through business acquisitions) may be damaged, disrupted or shut down due to attacks by computer hackers, computer viruses, ransomware, human error or malfeasance, power outages, hardware failures, telecommunication or utility failures, catastrophes or other unforeseen events, and in any such circumstances our system redundancy and other disaster recovery planning may be ineffective or inadequate. Attacks may also target hardware, software and information installed, stored or transmitted in our products after such products have been purchased and incorporated into third-party products, facilities or infrastructure. Security breaches of our systems, regardless of whether the breach is attributable to a vulnerability in our products or services, or security breaches of third parties’ systems, which we rely upon to process, store, or transmit electronic information, could result in the misappropriation, destruction or unauthorized disclosure of confidential information or personal data belonging to us or to our employees, partners, customers, patients or suppliers. Like most multinational corporations, our information technology systems have been subject to computer viruses, malicious codes, unauthorized access and other cyber-attacks and we expect the sophistication and frequency of such attacks to continue to increase. Unauthorized tampering, adulteration or interference with our products may also adversely affect product functionality and result in loss of data, risk to patient safety and product recalls or field actions. Any of the attacks, breaches or other disruptions or damage described above could interrupt our operations or the operations of our customers and partners, delay production and shipments, result in theft of our and our customers’ intellectual property and trade secrets, damage customer, patient, business partner and employee relationships and our reputation or result in defective products or services, legal claims and proceedings, liability and penalties under privacy laws and increased costs for security and remediation, each of which could adversely affect our business, reputation and financial statements.
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If we are unable to maintain reliable information technology systems and appropriate controls with respect to global data privacy and security requirements and prevent data breaches, we may suffer adverse regulatory consequences, business consequences and litigation. As a global organization, we are subject to data privacy and security laws, regulations, and customer-imposed controls in numerous jurisdictions as a result of having access to and processing confidential, personal and/or sensitive data in the course of our business. For example, in the United States, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) privacy and security rules require certain of our operations to maintain controls to protect the availability and confidentiality of patient health information, individual states regulate data breach and security requirements and multiple governmental bodies assert authority over aspects of the protection of personal privacy. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured patient health information, a complaint about privacy practices or an audit by HHS, may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. The new EU General Data Protection Regulation (“GDPR”), which became effective in May 2018, has imposed significantly stricter requirements in how we collect, transmit, process and retain personal data, including, among other things, a requirement for almost immediate notice of data breaches to supervisory authorities in certain circumstances and prompt notice to data subjects in certain circumstances with significant fines for non-compliance. Failure to comply with the requirements of GDPR and the applicable national data protection laws of the EU member states may result in fines of up to €20,000,000 or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, and other administrative penalties. Several other countries such as China and Russia have passed, and other countries are considering passing, laws that require personal data relating to their citizens to be maintained on local servers and impose additional data transfer restrictions. Lastly, there is a new, broad privacy law in California, the California Consumer Privacy Act (“CCPA”), which comes into effect in January 2020. The CCPA has some of the same features as the GDPR, and has already prompted several other states to follow with similar laws. Government enforcement actions can be costly and interrupt the regular operation of our business, and data breaches or violations of data privacy laws can result in fines, reputational damage and civil lawsuits, any of which may adversely affect our business, reputation and financial statements. Also, the manufacturer may be subject to significant regulatory fines or penalties. In addition, compliance with the varying data privacy regulations across the United States and around the world have required significant expenditures and may require additional expenditures, and may require changes in our products or business models that increase competition or reduce sales.
Our operations, products and services expose us to the risk of environmental, health and safety liabilities, costs and violations that could adversely affect our business, reputation and financial statements.
Our operations, products and services are subject to environmental laws and regulations, which impose limitations on the discharge of pollutants into the environment, establish standards for the use, generation, treatment, storage and disposal of hazardous and non-hazardous wastes and impose end-of-life disposal and take-back programs. We must also comply with various health and safety regulations in the United States and abroad in connection with our operations. We cannot assure you that our environmental, health and safety compliance program (or the compliance programs of businesses we acquire) have been or will at all times be effective. Failure to comply with any of these laws could result in civil and criminal, monetary and non-monetary penalties and damage to our reputation. In addition, we cannot provide assurance that our costs of complying with current or future environmental protection and health and safety laws will not exceed our estimates or adversely affect our financial statements.
In addition, we may incur costs related to remedial efforts or alleged environmental damage associated with past or current waste disposal practices or other hazardous materials handling practices. We are also from time to time party to personal injury, property damage or other claims brought by private parties alleging injury or damage due to the presence of or exposure to hazardous substances. We may also become subject to additional remedial, compliance or personal injury costs due to future events such as changes in existing laws or regulations, changes in agency direction or enforcement policies, developments in remediation technologies, changes in the conduct of our operations and changes in accounting rules. For additional information regarding these risks, please refer to Note 14 to the audited Combined Financial Statements included in this prospectus. We cannot assure you that our liabilities arising from past or future releases of, or exposures to, hazardous substances will not exceed our estimates or adversely affect our reputation and financial statements or that we will not be subject to additional claims for personal injury or remediation in the future based on our past, present or future business activities. However, based on the information we currently have we do not believe that it is reasonably possible that any amounts we may be required to pay in connection with environmental matters in excess of our reserves as of the date of this prospectus will have a material effect on our financial statements.
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Our businesses are subject to extensive regulation; failure to comply with those regulations could adversely affect our financial statements and our business, including our reputation.
In addition to the environmental, health, safety, health care, medical device, anticorruption, data privacy and other regulations noted elsewhere in this prospectus, our businesses are subject to extensive regulation by U.S. and non-U.S. governmental and self-regulatory entities at the supranational, federal, state, local and other jurisdictional levels, including the following:
• | we are required to comply with various import laws and export control and economic sanctions laws, which may affect our transactions with certain customers, business partners and other persons and dealings between our employees and between our subsidiaries. In certain circumstances, export control and economic sanctions regulations may prohibit the export of certain products, services and technologies. In other circumstances, we may be required to obtain an export license before exporting the controlled item. Compliance with the various import laws that apply to our businesses can restrict our access to, and increase the cost of obtaining, certain products and at times can interrupt our supply of imported inventory; and |
• | we also have agreements to sell products and services to government entities and are subject to various statutes and regulations that apply to companies doing business with government entities (less than 1% of our 2018 sales were made to the U.S. federal government). The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing and other terms and conditions that are not applicable to private contracts. Our agreements with government entities may be subject to termination, reduction or modification at the convenience of the government or in the event of changes in government requirements, reductions in federal spending and other factors, and we may underestimate our costs of performing under the contract. In certain cases, a governmental entity may require us to pay back amounts it has paid to us. Government contracts that have been awarded to us following a bid process could become the subject of a bid protest by a losing bidder, which could result in loss of the contract. We are also subject to investigation and audit for compliance with the requirements governing government contracts. |
These are not the only regulations that our businesses must comply with. The regulations we are subject to have tended to become more stringent over time and may be inconsistent across jurisdictions. We, our representatives and the industries in which we operate may at times be under review and/or investigation by regulatory authorities. Compliance with these and other regulations may also affect our returns on investment, require us to incur significant expenses or modify our business model or impair our flexibility in modifying product, marketing, pricing or other strategies for growing our business. Our products and operations are also often subject to the rules of industrial standards bodies such as the International Standards Organization, and failure to comply with these rules could result in withdrawal of certifications needed to sell our products and services and otherwise adversely impact our business and financial statements. Non-compliance with applicable requirements (or any alleged or perceived failure to comply) could result in import detentions, fines, damages, civil and administrative penalties, injunctions, suspensions or losses of regulatory approvals, recall or seizure of products, operating restrictions, refusal of the government to approve product export applications or allow us to enter into supply contracts, disbarment from selling to certain governmental agencies or exclusion from government funded healthcare programs, such as Medicare and Medicaid or similar programs in other countries or jurisdictions, integrity oversight and reporting obligations to resolve allegations of non-compliance, disruption of our business, limitation on our ability to manufacture, import, export and sell products and services, loss of customers, significant legal and investigatory fees, disgorgement, individual imprisonment, reputational harm, contractual damages, diminished profits, curtailment or restricting of business operations, criminal prosecution and other monetary and non-monetary penalties. For additional information regarding these risks, please refer to the section entitled “Business—Regulatory Matters.”
We may be required to recognize impairment charges for our goodwill and other intangible assets.
As of December 31, 2018, the net carrying value of our goodwill and other intangible assets totaled approximately $4.7 billion. In accordance with generally accepted accounting principles, we periodically assess these assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of our assets, changes in the structure of our business, divestitures, market capitalization declines, or increases in associated discount rates may impair our goodwill and other intangible assets. Any charges relating to such impairments would adversely affect our results of operations in the periods recognized.
Foreign currency exchange rates may adversely affect our financial statements.
Sales and purchases in currencies other than the U.S. dollar expose us to fluctuations in foreign currencies relative to the U.S. dollar and may adversely affect our financial statements. Increased strength of the U.S. dollar increases the effective price of our products sold in U.S. dollars into other countries, which may require us to lower our prices or adversely affect sales to the extent we do not increase local currency prices. Decreased strength of the U.S. dollar could adversely affect the cost of
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materials, products and services we purchase overseas. Sales and expenses of our non-U.S. businesses are also translated into U.S. dollars for reporting purposes and the strengthening or weakening of the U.S. dollar could result in unfavorable translation effects. In addition, certain of our businesses may invoice customers in a currency other than the business’ functional currency, and movements in the invoiced currency relative to the functional currency could also result in unfavorable translation effects. We also face exchange rate risk from our investments in subsidiaries owned and operated in foreign countries.
Changes in our tax rates or exposure to additional income tax liabilities or assessments could affect our profitability. In addition, audits by tax authorities could result in additional tax payments for prior periods.
We are subject to income taxes in the U.S. and in numerous non-U.S. jurisdictions. On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. The TCJA significantly revised the U.S. federal corporate income tax law by, among other things, lowering the corporate income tax rate to 21%, implementing a quasi-territorial tax system, and imposing a one-time tax on unremitted cumulative non-U.S. earnings of foreign subsidiaries (“Transition Tax”). The U.S. Treasury Department and IRS continue to issue regulations with respect to implementing the TCJA and further regulations are expected to be issued.
Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the TCJA), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, the complexity of our intercompany arrangements, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, our estimates of effective tax rate and income tax assets and liabilities may be incorrect and our financial statements could be adversely affected; please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of additional factors that may adversely affect our effective tax rate and decrease our profitability in any period. The impact of these factors referenced in the first sentence of this paragraph may be substantially different from period-to-period.
In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities, such as the audits described in Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited Combined Financial Statements included in this prospectus. If audits result in payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements.
Changes in tax law relating to multinational corporations could adversely affect our tax position.
The U.S. Congress, government agencies in non-U.S. jurisdictions where we and our affiliates do business, and the Organisation for Economic Co-operation and Development (“OECD”) have recently focused on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where profits are claimed to be earned for tax purposes in low-tax jurisdictions, or payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. The OECD has released several components of its comprehensive plan to create an agreed set of international rules for addressing base erosion and profit shifting. As a result, the tax laws in the United States and other countries in which we do business could change on a prospective or retroactive basis, and any such changes could adversely affect our business and financial statements.
We are subject to a variety of litigation and other legal and regulatory proceedings in the course of our business that could adversely affect our business and financial statements.
We are subject to a variety of litigation and other legal and regulatory proceedings incidental to our business (or the business operations of previously owned entities), including claims or counterclaims for damages arising out of the use of products or services and claims relating to intellectual property matters, employment matters, tax matters, commercial disputes, breach of contract claims, competition and sales and trading practices, environmental matters, personal injury, insurance coverage and acquisition-related matters, as well as regulatory subpoenas, requests for information, investigations and enforcement. We may also become subject to lawsuits as a result of past or future acquisitions or as a result of liabilities retained from, or representations, warranties or indemnities provided in connection with, businesses divested by us or our predecessors. The types of claims made in lawsuits include claims for compensatory damages, punitive and consequential damages (and in some cases, treble damages) and/or injunctive relief. The defense of these lawsuits may divert our management’s attention, we may incur significant expenses in defending these lawsuits, and we may be required to pay damage awards or settlements or become subject to equitable remedies that could adversely affect our operations and financial statements. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. In addition, developments in proceedings in any given period may require us to adjust the loss contingency estimates that we have recorded in our financial statements, record estimates for liabilities or assets previously not susceptible of reasonable estimates or pay cash settlements or judgments. Any of these developments could adversely affect our financial statements in any particular period. We cannot assure you that our liabilities in connection with litigation and other legal and regulatory proceedings will
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not exceed our estimates or adversely affect our financial statements and business. However, based on our experience, current information and applicable law, we do not believe that it is reasonably possible that any amounts we may be required to pay in connection with litigation and other legal and regulatory proceedings in excess of our reserves as of the date of this prospectus will have a material effect on our financial statements.
If we do not or cannot adequately protect our intellectual property, or if third parties infringe our intellectual property rights, we may suffer competitive injury or expend significant resources enforcing our rights.
Many of the markets we serve are technology-driven, and as a result intellectual property rights play a significant role in product development and differentiation. We own numerous patents, trademarks, copyrights, trade secrets and other intellectual property and licenses to intellectual property owned by others, which in aggregate are important to our business. The intellectual property rights that we obtain, however, may not be sufficiently broad or otherwise may not provide us a significant competitive advantage, and patents may not be issued for pending or future patent applications owned by or licensed to us. In addition, the steps that we and our licensors have taken to maintain and protect our intellectual property may not prevent it from being challenged, invalidated, circumvented, designed-around or becoming subject to compulsory licensing, particularly in countries where intellectual property rights are not highly developed or protected. In some circumstances, enforcement may not be available to us because an infringer has a dominant intellectual property position or for other business reasons, or countries may require compulsory licensing of our intellectual property. We also rely on nondisclosure and noncompetition agreements with employees, consultants and other parties to protect, in part, trade secrets and other proprietary rights. There can be no assurance that these agreements will adequately protect our trade secrets and other proprietary rights and will not be breached, that we will have adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets or other proprietary rights. Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our intellectual property or detect or prevent circumvention or unauthorized use of such property and the cost of enforcing our intellectual property rights could adversely impact our business, including our competitive position, and financial statements.
Third parties may claim that we are infringing or misappropriating their intellectual property rights and we could suffer significant litigation expenses, losses or licensing expenses or be prevented from selling products or services.
From time to time, we receive notices from third parties alleging intellectual property infringement or misappropriation of third parties’ intellectual property and cannot be certain that the conduct of our business does not and will not infringe or misappropriate the intellectual property rights of others. Any dispute or litigation regarding intellectual property could be costly and time-consuming to defend due to the complexity of many of our technologies and the uncertainty of intellectual property litigation. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or misappropriation. In addition, as a result of such claims of infringement or misappropriation, we could lose our rights to critical technology, be unable to license critical technology or sell critical products and services, be required to pay substantial damages or license fees with respect to the infringed rights, be required to license technology or other intellectual property rights from others, be required to cease marketing, manufacturing or using certain products or be required to redesign, re-engineer or re-brand our products at substantial cost, any of which could adversely impact our business, including our competitive position, and financial statements. Third-party intellectual property rights may also make it more difficult or expensive for us to meet market demand for particular product or design innovations. If we are required to seek licenses under patents or other intellectual property rights of others, we may not be able to acquire these licenses on acceptable terms, if at all. Even if we successfully defend against claims of infringement or misappropriation, we may incur significant costs and diversion of management attention and resources, which could adversely affect our business and financial statements.
Defects and unanticipated use or inadequate disclosure with respect to our products or services (including software), or allegations thereof, could adversely affect our business, reputation and financial statements.
Manufacturing or design defects or “bugs” in, unanticipated use of, safety or quality issues (or the perception of such issues) with respect to, “off label” use of, or inadequate disclosure of risks relating to the use of products and services that we make or sell (including items that we source from third parties) can lead to personal injury, death, property damage, loss of profits or other liability. These events could lead to recalls or safety alerts, result in the removal of a product or service from the market and result in product liability or similar claims being brought against us. Recalls, removals and product liability and similar claims (regardless of their validity or ultimate outcome) can result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and services. Our business can also be affected by studies of the utilization, safety and efficacy of medical device products and components that are conducted by industry participants, government agencies and others. Any of the above can result in the discontinuation of marketing of such products in one or more countries, and may give rise to claims for damages from persons who believe they have been injured as a result of product issues, including claims by individuals or groups seeking to represent a class.
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For a discussion of risks pertaining to the dental amalgam sold by us, see “Business—Medical Device Regulations.”
The manufacture of many of our products is a highly exacting and complex process, and if we directly or indirectly encounter problems manufacturing products, our reputation, business and financial statements could suffer.
The manufacture of many of our products is a highly exacting and complex process, due in part to strict regulatory requirements. Problems may arise during manufacturing for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, natural disasters and environmental factors, and if not discovered before the product is released to market could result in recalls and product liability exposure. Because of the time required to approve and license certain regulated manufacturing facilities and other stringent regulations of the FDA and similar agencies regarding the manufacture of certain of our products, an alternative manufacturer may not be available on a timely basis to replace such production capacity. Any of these manufacturing problems could result in significant costs, liability and lost sales, loss of market share as well as negative publicity and damage to our reputation that could reduce demand for our products.
Our financial results are subject to fluctuations in the cost and availability of commodities that we use in our operations.
As further discussed in the section entitled “Business—Materials,” our manufacturing and other operations employ a wide variety of components, raw materials and other commodities, including metallic-based components, electronic components, chemicals, plastics and other petroleum-based products. Prices for and availability of these components, raw materials and other commodities have fluctuated significantly in the past. Any sustained interruption in the supply of these items could adversely affect our business. In addition, due to the highly competitive nature of the industries that we serve, the cost-containment efforts of our customers and the terms of certain contracts we are party to, if commodity prices rise we may be unable to pass along cost increases through higher prices. If we are unable to fully recover higher commodity costs through price increases or offset these increases through cost reductions, or if there is a time delay between the increase in costs and our ability to recover or offset these costs, our margins and profitability could decline and our financial statements could be adversely affected.
If we cannot adjust our manufacturing capacity or the purchases required for our manufacturing activities to reflect changes in market conditions and customer demand, our profitability may suffer. In addition, our reliance upon sole or limited sources of supply for certain materials, components and services could cause production interruptions, delays and inefficiencies.
We purchase materials, components and equipment from third parties for use in our manufacturing operations, including metallic-based components, electronic components, chemicals, plastics and other petroleum-based products. Our profitability could be adversely impacted if we are unable to adjust our purchases to reflect changes in customer demand and market fluctuations, including those caused by seasonality or cyclicality. During a market upturn, suppliers may extend lead times, limit supplies or increase prices. If we cannot purchase sufficient products at competitive prices and quality and on a timely enough basis to meet increasing demand, we may not be able to satisfy market demand, product shipments may be delayed, our costs may increase or we may breach our contractual commitments and incur liabilities. Conversely, in order to secure supplies for the production of products, we sometimes enter into non-cancelable purchase commitments with vendors, which could impact our ability to adjust our inventory to reflect declining market demands. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges and our profitability may suffer.
In addition, some of our businesses purchase certain requirements from sole or limited source suppliers for reasons of quality assurance, regulatory requirements, cost effectiveness, availability or uniqueness of design. If these or other suppliers encounter financial, operating or other difficulties or if our relationship with them changes, we might not be able to quickly establish or qualify replacement sources of supply. The supply chains for our businesses could also be disrupted by supplier capacity constraints, bankruptcy or exiting of the business for other reasons, decreased availability of key raw materials or commodities and external events such as natural disasters, pandemic health issues, war, terrorist actions, governmental actions and legislative or regulatory changes. Any of these factors could result in production interruptions, delays, extended lead times and inefficiencies.
Because we cannot always immediately adapt our production capacity and related cost structures to changing market conditions, our manufacturing capacity may at times exceed or fall short of our production requirements. Any or all of these problems could result in the loss of customers, provide an opportunity for competing products to gain market acceptance and otherwise adversely affect our financial statements.
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Our restructuring actions could have long-term adverse effects on our business.
In recent years, we have implemented significant restructuring activities across our businesses to adjust our cost structure, and we may engage in similar restructuring activities in the future. These restructuring activities and our regular ongoing cost reduction activities (including in connection with the integration of acquired businesses) reduce our available talent, assets and other resources and could slow improvements in our products and services, adversely affect our ability to respond to customers, limit our ability to increase production quickly if demand for our products increases and trigger adverse public attention. In addition, delays in implementing planned restructuring activities or other productivity improvements, unexpected costs or failure to meet targeted improvements may diminish the operational or financial benefits we expect to realize from such actions. Any of the circumstances described above could adversely impact our business and financial statements.
Changes in governmental regulations may reduce demand for our products or services or increase our expenses.
We compete in markets in which we and our customers must comply with supranational, federal, state, local and other jurisdictional regulations, such as regulations governing health and safety, the environment, food and drugs and privacy. We develop, configure and market our products and services to meet customer needs created by these regulations. These regulations are complex, change frequently, have tended to become more stringent over time and may be inconsistent across jurisdictions. Any significant change in any of these regulations (or in the interpretation or application thereof) could reduce demand for, increase our costs of producing or delay the introduction of new or modified products and services, or could restrict our existing activities, products and services.
Work stoppages, union and works council campaigns and other labor disputes could adversely impact our productivity and results of operations.
Certain of our U.S. and non-U.S. employees are subject to collective labor arrangements. We are subject to potential work stoppages, union and works council campaigns and other labor disputes, any of which could adversely impact our financial statements and business, including our productivity and reputation.
International economic, political, legal, compliance and business factors could negatively affect our financial statements.
In 2018, 56% of our sales were derived from customers outside the U.S. In addition, many of our manufacturing operations, suppliers and employees are located outside the U.S. Since our growth strategy depends in part on our ability to further penetrate markets outside the U.S. and increase the localization of our products and services, we expect to continue to increase our sales and presence outside the U.S., particularly in the high-growth markets. Our international business (and particularly our business in high-growth markets) is subject to risks that are customarily encountered in non-U.S. operations, including:
• | interruption in the transportation of materials to us and finished goods to our customers; |
• | differences in terms of sale, including payment terms; |
• | local product preferences and product requirements; |
• | changes in a country’s or region’s political or economic conditions, such as the devaluation of particular currencies; |
• | trade protection measures, embargoes and import or export restrictions and requirements; |
• | unexpected changes in laws or regulatory requirements, including changes in tax laws; |
• | capital controls and limitations on ownership and on repatriation of earnings and cash; |
• | the potential for nationalization of enterprises; |
• | changes in medical reimbursement policies and programs; |
• | limitations on legal rights and our ability to enforce such rights; |
• | difficulty in staffing and managing widespread operations; |
• | differing labor regulations; |
• | difficulties in implementing restructuring actions on a timely or comprehensive basis; |
• | differing protection of intellectual property; and |
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• | greater uncertainty, risk, expense and delay in commercializing products in certain foreign jurisdictions, including with respect to product and other regulatory approvals. |
Any of these risks could negatively affect our financial statements, business, growth rate, competitive position, results of operations and financial condition.
For example, we generate more than 5% of our annual sales from China. Accordingly, our business, financial condition and results of operations may be adversely influenced by political, economic and social conditions in China generally. Additionally, China’s government continues to play a significant role in regulating industry development by imposing industrial policies, and it maintains control over China’s economic growth through setting monetary policy and determining treatment of particular industries or companies. Further, considerable uncertainty exists regarding the long-term effects of the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. Any uncertainty or adverse changes to economic conditions in China or the policies of China’s government or its laws and regulations could have a material adverse effect on the overall economic growth of China and could impact our business and operating results, leading to a reduction in demand for our products and adversely affecting our financial statements, business, growth rate, competitive position, results of operations and financial condition.
Significant developments stemming from the United Kingdom’s referendum on membership in the EU could have an adverse effect on us.
In a referendum on June 23, 2016, voters in the United Kingdom (the “UK”) voted for the UK to exit the EU (referred to as Brexit). It is currently unclear how long it will take the UK to negotiate a withdrawal agreement and the terms of its withdrawal and the nature of its future relationship with the EU are still being decided. This referendum has caused and may continue to cause political and economic uncertainty, including significant volatility in global stock markets and currency exchange rate fluctuations. Even if no agreement is reached, the UK’s separation still becomes effective unless all EU members unanimously agree on an extension. Negotiations have commenced to determine the future terms of the UK relationship with the EU, including, among other things, the terms of trade between the UK and the EU. On April 11, 2019, the EU granted the UK an extension to October 31, 2019. The purpose of this extension is to allow for the ratification of the withdrawal agreement by the UK House of Commons. The effects of Brexit will depend on many factors, including any agreements that the UK makes to retain access to EU markets either during a transitional period or more permanently. Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. In a “hard Brexit” scenario, there could be increased costs from re-imposition of tariffs on trade between the UK and EU, shipping delays because of the need for customs inspections and procedures, and temporary shortages of certain goods. In addition, trade and investment between the UK, the EU, the United States and other countries will be impacted by the fact that the UK currently operates under the EU’s tax treaties. The UK will need to negotiate its own tax and trade treaties with countries all over the world, which could take years to complete. Depending on the terms of Brexit, we could become subject to tariffs and regulatory restrictions that could increase the costs and time related to doing business in the UK. Additionally, Brexit could result in the UK or the European Union significantly altering its regulations affecting the clearance or approval of our products that are developed or manufactured in the UK. Any new regulations could add time and expense to the conduct of our business, as well as the process by which our products receive regulatory approval in the UK, the EU and elsewhere. Any of these factors could adversely affect customer demand, our relationships with customers and suppliers and our business and financial statements. We have no manufacturing facilities in the UK, and for the year ended December 31, 2018, less than 2% of our sales were derived from customers located in the UK; however, the impact of Brexit could also impact our sales outside the UK.
If we suffer loss to our facilities, supply chains, distribution systems or information technology systems due to catastrophe or other events, our operations could be seriously harmed.
Our facilities, supply chains, distribution systems and information technology systems are subject to catastrophic loss due to fire, flood, earthquake, hurricane, public health crisis, war, terrorism or other natural or man-made disasters. If any of these facilities, supply chains or systems were to experience a catastrophic loss, it could disrupt our operations, delay production and shipments, result in defective products or services, damage customer relationships and our reputation and result in legal exposure and large repair or replacement expenses. The third-party insurance coverage that we maintain will vary from time to time in both type and amount depending on cost, availability and our decisions regarding risk retention, and may be unavailable or insufficient to protect us against such losses.
Our defined benefit pension plans are subject to financial market risks that could adversely affect our financial statements.
The performance of the financial markets and interest rates impact our defined benefit pension plan expenses and funding obligations. Significant changes in market interest rates, decreases in the fair value of plan assets, investment losses on plan assets and changes in discount rates may increase our funding obligations and adversely impact our financial statements. In
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addition, upward pressure on the cost of providing health care coverage to current employees and retirees may increase our future funding obligations and adversely affect our financial statements.
Our ability to attract, develop and retain talented executives and other key employees is critical to our success.
Our future performance is dependent upon our ability to attract, motivate and retain executives and other key employees. The loss of services of executives and other key employees or the failure to attract, motivate and develop talented new executives or other key employees could prevent us from successfully implementing and executing business strategies, and therefore adversely affect our financial statements. Our success also depends on our ability to attract, develop and retain a talented employee base. Certain employees could leave us given uncertainties relating to the separation, resulting in the inability to operate our business with employees possessing the appropriate expertise, which could have an adverse effect on our performance.
Risks Related to the Separation and Our Relationship with Danaher
We have no history of operating as a separate, publicly-traded company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly-traded company and may not be a reliable indicator of our future results.
The historical information about us in this prospectus refers to our businesses as operated by and integrated with Danaher. Our historical and pro forma financial information included in this prospectus is derived from the consolidated financial statements and accounting records of Danaher. Accordingly, the historical and pro forma financial information included in this prospectus does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly-traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:
• | prior to the separation, our businesses have been operated by Danaher as part of its broader corporate organization, rather than as a separate, publicly-traded company. Danaher or one of its affiliates performed various corporate functions for us such as legal, treasury, accounting, auditing, human resources, corporate affairs and finance. Our historical and pro forma financial results reflect allocations of corporate expenses from Danaher for such functions and are likely to be less than the expenses we would have incurred had we operated as a separate publicly-traded company. Following the separation, our cost related to such functions previously performed by Danaher may therefore increase; |
• | currently, our businesses are integrated with the other businesses of Danaher. Historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. Although we will enter into transition agreements with Danaher, these arrangements may not fully capture the benefits that we have enjoyed as a result of being integrated with Danaher and may result in us paying higher charges than in the past for these services. This could have an adverse effect on our results of operations and financial condition following the completion of the separation; |
• | generally, our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, have historically been satisfied as part of the corporate-wide cash management policies of Danaher. Following the completion of the separation, we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements; |
• | after the completion of the separation, the cost of capital for our businesses may be higher than Danaher’s cost of capital prior to the separation; and |
• | our historical financial information does not reflect the debt or the associated interest expense that we are expected to incur as part of the separation and distribution (if pursued). |
Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from Danaher. For additional information about the past financial performance of our businesses and the basis of presentation of the historical Combined Financial Statements and the unaudited pro forma combined financial statements of our businesses, please refer to the sections entitled “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited Combined Financial Statements and accompanying notes included elsewhere in this prospectus.
As a separate, publicly-traded company, we may not enjoy the same benefits that we did as a part of Danaher.
There is a risk that, by separating from Danaher, we may become more susceptible to market fluctuations and other adverse events than we would have been if we were still a part of the current Danaher organizational structure. As part of Danaher, we
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have been able to enjoy certain benefits from Danaher’s operating diversity, purchasing power and opportunities to pursue integrated strategies with Danaher’s other businesses. As a separate, publicly-traded company, we will not have similar diversity or integration opportunities and may not have similar purchasing power or access to capital markets. Additionally, as part of Danaher, we have been able to leverage the Danaher historical market reputation and performance and brand identity to recruit and retain key personnel to run our business. As a separate, publicly-traded company, we will not have the same historical market reputation and performance or brand identity as Danaher and it may be more difficult for us to recruit or retain such key personnel.
The unaudited pro forma combined financial statements included in this prospectus are presented for informational purposes only and may not be an indication of our financial condition or results of operations in the future.
The unaudited pro forma combined financial statements included in this prospectus are presented for informational purposes only and are not necessarily indicative of what our actual financial condition or results of operations would have been had the separation been completed on the date indicated. The assumptions used in preparing the pro forma financial information may not prove to be accurate and other factors may affect our financial condition or results of operations. Accordingly, our financial condition and results of operations in the future may not be evident from or consistent with such pro forma financial information.
Following the separation and this offering, Danaher will continue to control the direction of our business, and the concentrated ownership of our common stock may prevent you and other stockholders from influencing significant decisions.
Immediately following the completion of this offering, Danaher will own % of our outstanding shares of common stock (or % if the underwriters exercise in full their option to purchase additional shares of our common stock). As long as Danaher beneficially owns a majority of the total voting power of our outstanding shares, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors. If Danaher does not complete the distribution or otherwise dispose of its shares of our common stock, it could remain our controlling stockholder for an extended period of time or indefinitely. Even if Danaher were to control less than a majority of the total voting power of our outstanding shares, it may be able to influence the outcome of such corporate actions for so long as it owns a significant portion of our common stock.
Moreover, pursuant to the separation agreement, for so long as Danaher beneficially owns a majority of the total voting power of our outstanding shares with respect to the election of directors, Danaher is entitled to designate a majority of the directors (including the chairman of the Board) and a majority of the members of any committee of the Board. For so long as Danaher beneficially owns less than a majority but at least 10% of the total voting power of our outstanding shares with respect to the election of directors, Danaher is entitled to designate a number of directors in proportion to the percentage of total voting power beneficially owned by Danaher and has the right to include at least one of its designees on each committee of the Board.
Danaher’s interests may not be the same as, or may conflict with, the interests of our other stockholders. Investors in this offering will not be able to affect the outcome of any stockholder vote while Danaher controls the majority of the total voting power of our outstanding common stock. As a result, Danaher will be able to control, directly or indirectly and subject to applicable law, all matters affecting us, including:
• | any determination with respect to our business direction and policies, including the appointment and removal of officers and directors; |
• | any determinations with respect to mergers, business combinations or disposition of assets; |
• | our financing and dividend policy; |
• | compensation and benefit programs and other human resources policy decisions; |
• | termination of, changes to or determinations under our agreements with Danaher relating to the separation; |
• | changes to any other agreements that may adversely affect us; |
• | the payment of dividends on our common stock; and |
• | determinations with respect to our tax returns. |
Because Danaher’s interests may differ from ours or from those of our other stockholders, actions that Danaher takes with respect to us, as our controlling stockholder, may not be favorable to us or our other stockholders.
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The distribution of Danaher’s remaining interest in us may not occur.
Danaher has no obligation to complete the distribution. Whether Danaher proceeds with the distribution, in whole or in part, is in Danaher’s sole discretion and may be subject to a number of conditions, including the receipt of any necessary regulatory or other approvals, the existence of satisfactory market conditions and the receipt of a private letter ruling from the IRS and opinions of counsel to the effect that such distribution would be tax-free to Danaher and its stockholders. Even if Danaher elects to pursue the distribution, Danaher has the right to abandon or change the structure of the distribution if Danaher determines, in its sole discretion, that the distribution is not in the best interest of Danaher or its stockholders. Furthermore, if the distribution does not occur, and Danaher does not otherwise dispose of its shares of our common stock, the risks relating to Danaher’s control of us and the potential business conflicts of interest between Danaher and us will continue to be relevant to our stockholders. The liquidity of shares of our common stock in the market may be constrained for as long as Danaher continues to hold a significant position in our common stock. A lack of liquidity in our common stock could depress the price of our common stock.
If Danaher sells a controlling interest in our company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party.
Following the completion of this offering, Danaher will continue to own a controlling equity interest in our company. Danaher will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in a change of control of our company.
The ability of Danaher to privately sell its shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our common stock that may otherwise accrue to Danaher on its private sale of our common stock. Additionally, if Danaher privately sells its controlling interest in our company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. In addition, if Danaher sells a controlling interest in our company to a third party, our future indebtedness may be subject to acceleration, Danaher may terminate the transitional arrangements, and our other commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described herein and may have an adverse effect on our operating results and financial condition.
The distribution or future sales by Danaher or others of our common stock, or the perception that the distribution or such sales may occur, could depress our common stock price.
Immediately following the completion of this offering, Danaher will own % of our outstanding shares of common stock (or % if the underwriters exercise in full their option to purchase additional shares of our common stock). Subject to the restrictions described in the paragraph below, future sales of these shares in the public market will be subject to the volume and other restrictions of Rule 144 under the Securities Act of 1933 (the “Securities Act”), for so long as Danaher is deemed to be our affiliate, unless the shares to be sold are registered with the Securities and Exchange Commission, or SEC. We are unable to predict with certainty whether or when Danaher will sell a substantial number of shares of our common stock before or following the distribution or in the event the distribution does not occur. The distribution or sale by Danaher of a substantial number of shares after this offering, or a perception that the distribution or such sales could occur, could significantly reduce the market price of our common stock. Upon completion of this offering, except as otherwise described herein, all shares of our common stock that are being offered hereby will be freely tradable without restriction, assuming they are not held by our affiliates.
We, certain of our officers and directors and Danaher have agreed with the underwriters that, without the prior written consent of. J.P. Morgan Securities LLC, we and they will not, subject to certain exceptions and extensions, during the period ending 180 days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, or enter into any swap or other agreement that transfers to another, in whole or in part, any of the economic consequences of ownership of shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock or publicly disclose the intention to make any such offer, sale, pledge or disposition. J.P. Morgan Securities LLC may, in its sole discretion and at any time without notice, release all or any portion of the shares of our common stock subject to the lock-up.
Immediately following this offering, we intend to file a registration statement on Form S-8 registering under the Securities Act the shares of our common stock reserved for issuance under our incentive plan. If equity securities granted under our incentive plan are sold or it is perceived that they will be sold in the public market, the trading price of our common stock could decline substantially. These sales also could impede our ability to raise future capital.
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We will be a “controlled company” within the meaning of the rules of the NYSE and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Upon completion of this offering, Danaher will continue to control a majority of the total voting power of our outstanding shares. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NYSE. Under these rules, a listed company of which more than 50% of the total voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:
• | the requirement that a majority of the Board of Directors consist of independent directors; |
• | the requirement that our Nominating and Governance Committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities or if no such committee exists, that our director nominees be selected or recommended by independent directors constituting a majority of the Board’s independent directors in a vote in which only independent directors participate; |
• | the requirement that our Compensation Committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and |
• | the requirement for an annual performance evaluation of our Nominating and Governance and Compensation Committees. |
Following this offering, we intend to utilize these exemptions. As a result, we do not expect that a majority of the directors on our Board will be independent upon completion of this offering. In addition, we do not expect that the Nominating and Governance Committee or the Compensation Committee (or, until required by the applicable requirements of the NYSE, the Audit Committee) will consist entirely of independent directors. Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
We expect that Danaher and its directors and officers will have limited liability to us or you for breach of fiduciary duty.
Our amended and restated certificate of incorporation will provide that, subject to any contractual provision to the contrary, Danaher and its directors and officers will have no obligation to refrain from engaging in the same or similar business activities or lines of business as we do or doing business with any of our clients or consumers. As such, neither Danaher nor any officer or director of Danaher will be liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities.
Our customers, prospective customers, suppliers or other companies with whom we conduct business may conclude that our financial stability as a separate, publicly-traded company is insufficient to satisfy their requirements for doing or continuing to do business with them.
Some of our customers, prospective customers, suppliers or other companies with whom we conduct business may conclude that our financial stability as a separate, publicly-traded company is insufficient to satisfy their requirements for doing or continuing to do business with them, or may require us to provide additional credit support, such as letters of credit or other financial guarantees. Any failure of parties to be satisfied with our financial stability could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Potential indemnification liabilities to Danaher pursuant to the separation agreement could materially and adversely affect our businesses, financial condition, results of operations and cash flows.
The separation agreement, among other things, provides for indemnification obligations (for uncapped amounts) designed to make us financially responsible for substantially all liabilities that may exist relating to our business activities, whether incurred prior to or after the separation. If we are required to indemnify Danaher under the circumstances set forth in the separation agreement, we may be subject to substantial liabilities. Please refer to the section entitled “Certain Relationships and Related Person Transactions—Agreements with Danaher—The Separation Agreement—Release of Claims and Indemnification.”
In connection with our separation from Danaher, Danaher will indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that Danaher’s ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the separation agreement and certain other agreements with Danaher, Danaher will agree to indemnify us for certain liabilities as discussed further in “Certain Relationships and Related Person Transactions.” However, third parties could also seek to hold us responsible for any of the liabilities that Danaher has agreed to retain, and there can be no assurance that the indemnity from Danaher will be sufficient to protect us against the full amount of such liabilities, or that Danaher will be able
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to fully satisfy its indemnification obligations. In addition, Danaher’s insurance will not necessarily be available to us for liabilities associated with occurrences of indemnified liabilities prior to the separation, and in any event Danaher’s insurers may deny coverage to us for liabilities associated with certain occurrences of indemnified liabilities prior to the separation. Moreover, even if we ultimately succeed in recovering from Danaher or such insurance providers any amounts for which we are held liable, we may be temporarily required to bear these losses. Each of these risks could negatively affect our businesses, financial position, results of operations and cash flows.
If Danaher completes the distribution, and there is later a determination that the separation and/or the distribution is taxable for U.S. federal income tax purposes because the facts, assumptions, representations or undertakings underlying the IRS private letter ruling and/or any tax opinion are incorrect or for any other reason, then Danaher and its stockholders could incur significant U.S. federal income tax liabilities, and we could incur significant liabilities.
Danaher has applied to receive a private letter ruling from the IRS substantially to the effect that, among other things, the separation and the distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. If pursued, completion by Danaher of the distribution may be conditioned on, among other things, the receipt of a private letter ruling from the IRS and opinions of tax counsel, to the effect that, among other things, the distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code. If pursued, the ruling and opinions would rely on certain facts, assumptions, representations and undertakings from Danaher and us regarding the past and future conduct of the companies’ respective businesses and other matters. If any of these facts, assumptions, representations or undertakings are incorrect or not otherwise satisfied, Danaher and its stockholders may not be able to rely on the ruling or the opinions of tax counsel and could be subject to significant tax liabilities. Notwithstanding the private letter ruling and opinions of tax counsel, the IRS could determine on audit that the separation and/or the distribution is taxable if it determines that any of these facts, assumptions, representations or undertakings are not correct or have been violated or if it disagrees with the conclusions in the opinions that are not covered by the private letter ruling, or for other reasons, including as a result of certain significant changes in the stock ownership of Danaher or us after the distribution. If the separation and/or the distribution is determined to be taxable for U.S. federal income tax purposes, Danaher and/or its stockholders could incur significant U.S. federal income tax liabilities, and we could also incur significant liabilities. Under the tax matters agreement between Danaher and us, we will generally be required to indemnify Danaher against taxes incurred by Danaher that arise as a result of a breach of any representation made by us, or as a result of us taking or failing to take, as the case may be, certain actions, including in each case those provided in connection with the private letter ruling from the IRS and opinion of tax counsel, that result in the distribution failing to meet the requirements of a tax-free distribution under Sections 355 and 368(a)(1)(D) of the Code. For a discussion of the tax matters agreement, please refer to the section entitled “Certain Relationships and Related Person Transactions—Tax Matters Agreement.”
We may be affected by significant restrictions, including on our ability to engage in certain corporate transactions for a two-year period after the distribution in order to avoid triggering significant tax-related liabilities.
To preserve the tax-free treatment for U.S. federal income tax purposes to Danaher of the separation and distribution (if pursued), under the tax matters agreement that we will enter into with Danaher, we will be restricted from taking any action that prevents the separation and distribution (if pursued) from being tax-free for U.S. federal income tax purposes. Under the tax matters agreement, for the two-year period following the distribution (if pursued), as described in the section entitled “Certain Relationships and Related Person Transactions—Agreements with Danaher—Tax Matters Agreement—Preservation of the Tax-Free Status of Certain Aspects of the Distribution,” we will be subject to specific restrictions on our ability to enter into acquisition, merger, liquidation, sale and stock redemption transactions with respect to our stock. These restrictions may limit our ability to pursue certain strategic transactions or other transactions that we may believe to be in the best interests of our stockholders or that might increase the value of our business. These restrictions will not limit the acquisition of other businesses by us for cash consideration. In addition, under the tax matters agreement, we may be required to indemnify Danaher against any such tax liabilities as a result of the acquisition of our stock or assets, even if we do not participate in or otherwise facilitate the acquisition. Furthermore, we will be subject to specific restrictions on discontinuing the active conduct of our trade or business, the issuance or sale of stock or other securities (including securities convertible into our stock but excluding certain compensatory arrangements), and sales of assets outside the ordinary course of business. Such restrictions may reduce our strategic and operating flexibility. For more information, please refer to the section entitled “Certain Relationships and Related Person Transactions—Agreements with Danaher—Tax Matters Agreement.”
After the separation, certain of our executive officers and directors may have actual or potential conflicts of interest because of their equity interest in Danaher. Also, certain of Danaher’s current executive officers are expected to become our directors, which may create conflicts of interest or the appearance of conflicts of interest.
Because of their current or former positions with Danaher, certain of our executive officers and directors own equity interests in Danaher. Continuing ownership of shares of Danaher common stock and equity awards could create, or appear to create, potential conflicts of interest if we and Danaher face decisions that could have implications for both Danaher and us, after the
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separation. In addition, certain of Danaher’s current executive officers are expected to become our directors, and this could create, or appear to create, potential conflicts of interest when we and Danaher encounter opportunities or face decisions that could have implications for both companies following the separation or in connection with the allocation of such directors’ time between Danaher and us.
Danaher may compete with us.
Danaher will not be restricted from competing with us. If Danaher in the future decides to engage in the type of business we conduct, it may have a competitive advantage over us, which may cause our business, financial condition and results of operations to be materially adversely affected.
We may not achieve some or all of the expected benefits of the separation, and the separation may adversely affect our businesses.
We may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation is expected to provide the following benefits, among others:
• | the separation will allow investors to separately value Danaher and us based on their distinct investment identities. Our businesses differ from Danaher’s other businesses in several respects, such as the market for products and manufacturing processes. The separation will enable investors to evaluate the merits, performance and future prospects of each company’s respective businesses and to invest in each company separately based on their distinct characteristics; |
• | the separation will allow us and Danaher to more effectively pursue our and Danaher’s distinct operating priorities and strategies and enable management of both companies to focus on unique opportunities for long-term growth and profitability. For example, while our management will be enabled to focus exclusively on our businesses, the management of Danaher will be able to grow its businesses. Our and Danaher’s separate management teams will also be able to focus on executing the companies’ differing strategic plans without diverting attention from the other businesses; |
• | the separation will permit each company to concentrate its financial resources solely on its own operations without having to compete with each other for investment capital. This will provide each company with greater flexibility to invest capital in its businesses in a time and manner appropriate for its distinct strategy and business needs; |
• | the separation will create an independent equity structure that will afford us direct access to the capital markets and facilitate our ability to capitalize on our unique growth opportunities; and |
• | the separation will facilitate incentive compensation arrangements for employees more directly tied to the performance of the relevant company’s businesses, and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives. |
We may not achieve these and other anticipated benefits for a variety of reasons, including, among others:
• | as a current part of Danaher, our businesses benefit from Danaher’s size and purchasing power in procuring certain goods and services. After the separation, as a separate entity, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable as those Danaher obtained prior to the separation. We may also incur costs for certain functions previously performed by Danaher, such as accounting, tax, legal, human resources and other general administrative functions that are higher than the amounts reflected in our historical financial statements, which could cause our profitability to decrease; |
• | the actions required to separate our and Danaher’s respective businesses could disrupt our and Danaher’s operations; |
• | certain costs and liabilities that were otherwise less significant to Danaher as a whole will be more significant for us and Danaher as separate companies, after the separation; |
• | we (and prior to the separation, Danaher) will incur costs in connection with the transition to being a separate, publicly-traded company that may include accounting, tax, legal and other professional services costs, recruiting and relocation costs associated with hiring or reassigning our personnel, costs related to establishing a new brand identity in the marketplace and costs to separate information systems; |
• | we may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: (i) the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our businesses; (ii) following the separation, we may be more susceptible to |
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market fluctuations and other adverse events than if it were still a part of Danaher; and (iii) following the separation, our businesses will be less diversified than Danaher’s businesses prior to the separation; and
• | to preserve the tax-free treatment for U.S. federal income tax purposes to Danaher of the separation and distribution, if pursued, under the tax matters agreement that we will enter into with Danaher, we will be restricted from taking any action that prevents such transactions from being tax-free for U.S. federal income tax purposes. These restrictions may limit our ability to pursue certain strategic transactions or engage in other transactions that might increase the value of our businesses. |
If we fail to achieve some or all of the benefits expected to result from the separation, or if such benefits are delayed, our businesses, operating results and financial condition could be adversely affected.
We may have received better terms from unaffiliated third parties than the terms we will receive in our agreements with Danaher.
The agreements we will enter into with Danaher in connection with the separation, including the separation agreement, transition services agreement, employee matters agreement, tax matters agreement, intellectual property matters agreement, DBS license agreement and the registration rights agreement were prepared in the context of our separation from Danaher while we were still a wholly-owned subsidiary of Danaher. Accordingly, during the period in which the terms of those agreements were prepared, we did not have a separate or independent Board of Directors or a management team that was separate from or independent of Danaher. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. Arm’s-length negotiations between Danaher and an unaffiliated third party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to the unaffiliated third party. For more information, please refer to the section entitled “Certain Relationships and Related Person Transactions.”
We or Danaher may fail to perform under various transaction agreements that will be executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.
The separation agreement and other agreements to be entered into in connection with the separation will determine the allocation of assets and liabilities between the companies following the separation for those respective areas and will include any necessary indemnifications related to liabilities and obligations. The transition services agreement will provide for the performance of certain services by each company for the benefit of the other for a period of time after the separation. We will rely on Danaher after the separation to satisfy its performance and payment obligations under these agreements. If Danaher is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once certain transaction agreements expire, we may not be able to operate our businesses effectively and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that Danaher currently provides to us. However, we may not be successful in implementing these systems and services or in transitioning data from Danaher’s systems to us.
In addition, we expect this process to be complex, time-consuming and costly. We are also establishing or expanding our own tax, treasury, internal audit, investor relations, corporate governance and listed company compliance and other corporate functions. We expect to incur one-time costs to replicate, or outsource from other providers, these corporate functions to replace the corporate services that Danaher historically provided us prior to the separation. Any failure or significant downtime in our own financial, administrative or other support systems or in the Danaher financial, administrative or other support systems during the transitional period during which Danaher provides us with support could negatively impact our results of operations or prevent us from paying our suppliers and employees, executing business combinations and foreign currency transactions or performing administrative or other services on a timely basis, which could negatively affect our results of operations.
In particular, our day-to-day business operations rely on our information technology systems. A significant portion of the communications among our personnel, customers and suppliers take place on our information technology platforms. We expect the transfer of information technology systems from Danaher to us to be complex, time consuming and costly. There is also a risk of data loss in the process of transferring information technology. As a result of our reliance on information technology systems, the cost of such information technology integration and transfer and any such loss of key data could have an adverse effect on our business, financial condition and results of operations.
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As of the date of this prospectus, we expect to have outstanding indebtedness of approximately $1.5 billion and the ability to incur an additional $250 million of indebtedness under a revolving credit agreement we expect to enter into, and in the future we may incur additional indebtedness. This indebtedness could adversely affect our businesses and our ability to meet our obligations and pay dividends.
As of the date of this prospectus, we expect to have outstanding indebtedness of approximately $1.5 billion, and have the ability to incur an additional $250 million of indebtedness under a revolving credit agreement that we expect to enter into prior to the closing of this offering. See the section entitled “Description of Certain Indebtedness.” This debt could have important, adverse consequences to us and our investors, including:
• | requiring a substantial portion of our cash flow from operations to make interest payments; |
• | making it more difficult to satisfy other obligations; |
• | increasing the risk of a future credit ratings downgrade of our debt, which could increase future debt costs and limit the future availability of debt financing; |
• | increasing our vulnerability to general adverse economic and industry conditions; |
• | reducing the cash flow available to fund capital expenditures and other corporate purposes and to grow our businesses; |
• | limiting our ability to pay dividends; |
• | limiting our flexibility in planning for, or reacting to, changes in our businesses and industries; and |
• | limiting our ability to borrow additional funds as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase shares of our common stock. |
The debt financing will not be available for borrowings until the date on which certain conditions are satisfied, which we expect will be satisfied prior to the completion of this offering. We anticipate that the instruments governing the debt financing will contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term interest, including for example EBITDA-based leverage and interest coverage ratios. If we breach any of these restrictions and cannot obtain a waiver from the lenders on favorable terms, subject to applicable cure periods, the outstanding indebtedness (and any other indebtedness with cross-default provisions) could be declared immediately due and payable, which would adversely affect our liquidity and financial statements. In addition, any failure to obtain and maintain credit ratings from independent rating agencies would adversely affect our cost of funds and could adversely affect our liquidity and access to the capital markets. If we add new debt, the risks described above could increase. For additional information regarding the debt financing, please refer to the section entitled “Description of Certain Indebtedness.”
The risks described above will increase with the amount of indebtedness we incur, and in the future we may incur significant indebtedness in addition to the indebtedness described above. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to service our outstanding debt or to repay the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures, or to dispose of material assets or operations, alter our dividend policy (if we pay dividends), seek additional debt or equity capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative measures on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations. The instruments that will govern our indebtedness may restrict our ability to dispose of assets and may restrict the use of proceeds from those dispositions. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations when due.
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In addition, we conduct our operations through our subsidiaries. Accordingly, repayment of our indebtedness will depend on the generation of cash flow by our subsidiaries, including certain international subsidiaries, and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not have any obligation to pay amounts due on our indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or may not be permitted to, make adequate distributions to enable us to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal, tax and contractual restrictions may limit our ability to obtain cash from our subsidiaries. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms or at all, may materially adversely affect our business, financial condition and results of operations and our ability to satisfy our obligations under our indebtedness or pay dividends on our common stock.
Risks Related to Our Shares of Common Stock and this Offering
We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation, and following the separation, the stock price of our common stock may fluctuate significantly.
Prior to the completion of this offering, there has been no public market for our common stock. We cannot guarantee that an active trading market will develop or be sustained for our common stock after this offering. If an active trading market does not develop, you may have difficulty selling your shares of our common stock at an attractive price, or at all. Further, certain individuals have the opportunity to purchase in aggregate up to 3% of our shares of common stock offered in this offering at the initial public offering price in a directed share program. To the extent these individuals purchase shares in this offering, fewer shares may be actively traded in the public market because these individuals may be restricted from selling the shares by a 180-day lock-up restriction, which would reduce the liquidity of the market for our common stock. In addition, we cannot predict the prices at which shares of our common stock may trade after this offering.
The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:
• | our quarterly or annual earnings, or those of other companies in our industry; |
• | the failure of securities analysts to cover our common stock after the separation; |
• | actual or anticipated fluctuations in our operating results; |
• | changes in earnings estimated by securities analysts or our ability to meet those estimates; |
• | the operating and stock price performance of other comparable companies; |
• | changes to the regulatory and legal environment in which we operate; |
• | overall market fluctuations and domestic and worldwide economic conditions; and |
• | other factors described in these “Risk Factors” and elsewhere in this prospectus. |
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our common stock.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may be negatively affected.
As a public company, we will be required to maintain internal controls over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we expect we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). Our independent registered public accounting firm will also be required to express an opinion as to the effectiveness of our internal control over financial reporting. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed or operating.
The process of designing, implementing, and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly, and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or to
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assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
The obligations associated with being a public company will require significant resources and management attention.
Currently, we are not directly subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Following the effectiveness of the registration statement of which this prospectus forms a part, we will be directly subject to such reporting and other obligations under the Exchange Act and the rules of the NYSE. As a separate public company, we are required to, among other things:
• | prepare and distribute periodic reports, proxy statements and other stockholder communications in compliance with the federal securities laws and rules; |
• | have our own board of directors and committees thereof, which comply with federal securities laws and rules and applicable stock exchange requirements; |
• | maintain an internal audit function; |
• | institute our own financial reporting and disclosure compliance functions; |
• | establish an investor relations function; |
• | establish internal policies, including those relating to trading in our securities and disclosure controls and procedures; and |
• | comply with the rules and regulations implemented by the SEC, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Public Company Accounting Oversight Board and the NYSE. |
These reporting and other obligations will place significant demands on our management and our administrative and operational resources, and we expect to face increased legal, accounting, administrative and other costs and expenses relating to these demands that we had not incurred as a segment of Danaher. Certain of these functions will be provided on a transitional basis by Danaher pursuant to a transition services agreement. See “Certain Relationships and Related Person Transactions.” Our investment in compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from sales-generating activities to compliance activities, which could have an adverse effect on our business, financial position, results of operations and cash flows.
The market price of shares of our common stock may be volatile, which could cause the value of your investment to decline.
Even if a trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as general economic, market or political conditions, could reduce the market price of shares of our common stock regardless of our operating performance. In addition, our operating results could be below the expectations of public market analysts and investors due to a number of potential factors, including variations in our quarterly operating results or dividends, if any, to stockholders, additions or departures of key management personnel, failure to meet analysts’ earnings estimates, publication of research reports about our industry, litigation and government investigations, changes or proposed changes in laws or regulations or differing interpretations or enforcement thereof affecting our business, adverse market reaction to any indebtedness we may incur or securities we may issue in the future, changes in market valuations of similar companies or speculation in the press or investment community, announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic partnerships, joint ventures or capital commitments, adverse publicity about the industries we participate in or individual scandals, and in response the market price of shares of our common stock could decrease significantly. You may be unable to resell your shares of our common stock at or above the initial public offering price.
In the past few years, stock markets have experienced extreme price and volume fluctuations. In the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. Such litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
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Investors in this offering will experience immediate and substantial dilution.
The initial public offering price per share of our common stock will be substantially higher than our pro forma net tangible book value per share immediately after this offering. As a result, you will pay a price per share of common stock that substantially exceeds the per share book value of our tangible assets after subtracting our liabilities. Assuming an offering price of $ per share of our common stock, which is the midpoint of the range on the cover page of this prospectus, you will incur immediate and substantial dilution in an amount of $ per share of common stock.
We cannot guarantee the payment of dividends on our common stock, or the timing or amount of any such dividends.
We have not yet determined whether or the extent to which we will pay any dividends on our common stock. The payment of any dividends in the future, and the timing and amount thereof, to our stockholders will fall within the discretion of our Board. The Board’s decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our debt, industry practice, legal requirements and other factors that the Board deems relevant. For more information, please refer to the section entitled “Dividend Policy.” Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if we commence paying dividends.
Your percentage ownership in us may be diluted in the future.
In the future, your percentage ownership in us may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including equity awards that we will be granting to our directors, officers and employees. In addition, following the distribution (if pursued), our employees will have rights to purchase or receive shares of our common stock as a result of the conversion of their Danaher stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) into our stock options and restricted stock units. The conversion of these Danaher awards into our awards is described in further detail in the section entitled “Executive and Director Compensation—Compensation Discussion and Analysis—2018 NEO Compensation Decisions—Long-Term Incentive Awards.” As of the date of this prospectus, the exact number of shares of our common stock that will be subject to the converted equity awards is not determinable, and, therefore, it is not possible to determine the extent to which your percentage ownership in us could by diluted as a result of the conversion. It is anticipated that our Compensation Committee will grant additional equity awards to our employees and directors after this offering, from time to time, under our employee benefits plans. These additional awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock.
In addition, our amended and restated certificate of incorporation will authorize us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as the Board generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant the holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences that we could assign to holders of preferred stock could affect the residual value of the common stock. Please refer to the section entitled “Description of Capital Stock.”
Further, any future issuances of common stock would also be dilutive to the percentage ownership and voting power of our common stock, which could adversely affect the market price of our common stock.
Certain provisions in our amended and restated certificate of incorporation and bylaws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our common stock.
Our amended and restated certificate of incorporation and amended and restated bylaws will contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with the Board rather than to attempt an unsolicited takeover not approved by the Board. These provisions include, among others:
• | the inability of our stockholders to call a special meeting; |
• | from and after such time as Danaher ceases to beneficially own a majority of the total voting power of our outstanding shares, the inability of our stockholders to act by written consent; |
• | rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; |
• | the right of the Board to issue preferred stock without stockholder approval; |
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• | the division of the Board into three classes of directors, with each class serving a staggered three-year term, and this classified board provision could have the effect of making the replacement of incumbent directors more time consuming and difficult; |
• | a provision that stockholders may only remove directors with cause; |
• | the ability of our directors, and not stockholders, to fill vacancies (including those resulting from an enlargement of the Board) on the Board; and |
• | from and after such time as Danaher ceases to beneficially own a majority of the total voting power of our outstanding shares, the requirement that the affirmative vote of stockholders holding at least two-thirds of our voting stock is required to amend our amended and restated bylaws and certain provisions in our amended and restated certificate of incorporation. |
In addition, because we have not chosen to be exempt from Section 203 of the Delaware General Corporation Law (the “DGCL”), this provision could also delay or prevent a change of control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with a person that acquires, more than 15% of the outstanding voting stock of a Delaware corporation (an “interested stockholder”) shall not engage in any business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which the person became an interested stockholder, unless (i) prior to such time, the Board of Directors of such corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan); or (iii) on or subsequent to such time the business combination is approved by the Board of Directors of such corporation and authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such corporation not owned by the interested stockholder. Danaher and its affiliates have been approved as an interested stockholder of ours and therefore are not subject to Section 203. For so long as Danaher beneficially owns a majority of our total voting power, and therefore has the ability to designate a majority of the Board, directors designated by Danaher to serve on the Board would have the ability to pre-approve other parties, including potential transferees of Danaher’s shares of our common stock, so that Section 203 would not apply to such other parties.
We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with the Board and by providing the Board with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that the Board determines is not in the best interests of us and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors.
Our amended and restated certificate of incorporation will designate the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against us and our directors, officers, employees and stockholders.
Our amended and restated certificate of incorporation will provide that unless the Board of Directors otherwise determines, the state courts in the State of Delaware or, if no state court located within the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of us, any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or stockholders to us or our stockholders, any action asserting a claim arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or bylaws, or any action asserting a claim governed by the internal affairs doctrine. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors or officers, which may discourage such lawsuits against us and our directors, officers, employees and stockholders. Nothing in our amended and restated certificate of incorporation or bylaws precludes stockholders that assert claims under the applicable securities laws from bringing such claims in state or federal court, subject to applicable law. This provision would not apply to claims brought to enforce a duty or liability created by the Securities Act, Exchange Act or any other claim for which the federal courts have exclusive jurisdiction.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements included in this prospectus are “forward-looking statements” within the meaning of the United States federal securities laws. All statements other than historical factual information are forward-looking statements, including without limitation statements regarding: future financial performance, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position or other financial measures; our management’s plans and strategies for future operations, including statements relating to anticipated operating performance, cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions and the integration thereof, divestitures, spin-offs, split-offs or other distributions, strategic opportunities, securities offerings, stock repurchases, dividends and executive compensation; the effects of the separation or the distribution, if consummated, on our business; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; future regulatory approvals and the timing thereof; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; future foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the anticipated timing of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that we intend or believe will or may occur in the future. Terminology such as “believe,” “anticipate,” “will,” “should,” “could,” “intend,” “plan,” “expect,” “estimate,” “project,” “target,” “may,” “possible,” “potential,” “forecast” and “positioned” and similar references to future periods are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. Forward-looking statements are based on assumptions and assessments made by our management in light of their experience and perceptions of historical trends, current conditions, expected future developments and other factors they believe to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties, including but not limited to the risks and uncertainties set forth under “Risk Factors.”
Forward-looking statements are not guarantees of future performance and actual results may differ materially from the results, developments and business decisions contemplated by our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date of the prospectus, document, press release, webcast, call, materials or other communication in which they are made. Except to the extent required by applicable law, neither Danaher nor we assume any obligation to update or revise any forward-looking statement, whether as a result of new information, future events and developments or otherwise.
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USE OF PROCEEDS
We estimate that the net proceeds to us from this offering will be approximately $ million, or approximately $ million if the underwriters exercise in full their option to purchase additional shares of our common stock based on an assumed initial public offering price of $ per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
We intend to pay to Danaher, as partial consideration for the Dental business Danaher is contributing to us in connection with the separation, all of the net proceeds we will receive from the sale of our common stock in this offering, including any net proceeds we receive as a result of any exercise of the underwriters’ option to purchase additional shares, and approximately $1.5 billion of proceeds from term debt financing that we will enter into prior to the closing of this offering, as further described in the section entitled “Description of Certain Indebtedness.” The determination of the amount of our unrestricted cash upon the completion of this offering will be made by Danaher in good faith and will be final and binding on us.
Assuming no exercise of the underwriters’ option to purchase additional shares, each $1.00 increase (decrease) in the assumed initial public offering price of $ per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of one million shares of common stock sold in this offering by us would increase (decrease) our net proceeds by $ million, assuming the initial public offering price of $ per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. However, any such changes will not impact the cash retained by us following our payment to Danaher as described above.
The foregoing represents our current intentions with respect to the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but, subject to any direction from Danaher or our Board of Directors with respect to such proceeds, our management will have significant flexibility and discretion in applying the net proceeds. The occurrence of unforeseen events or changed business conditions could result in application of the net proceeds of this offering in a manner other than as described in this prospectus.
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DIVIDEND POLICY
We have not yet determined the extent to which we will pay any dividends on our common stock. The payment of any dividends in the future, and the timing and amount thereof, is within the discretion of the Board. The Board’s decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our future debt, industry practice, legal requirements and other factors that our Board deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if we commence paying dividends. Investors should not purchase our common stock with the expectation of receiving cash dividends.
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of March 29, 2019:
• | on a historical basis; and |
• | on a pro forma basis to give effect to (i) the separation and (ii) the sale by us of shares of common stock in this offering and the application of the proceeds from this offering as described in “Use of Proceeds,” based on an assumed initial public offering price of $ per share, the midpoint of the range set forth on the cover page of this prospectus and after deducting estimated underwriting discounts and commissions and estimated offering expenses. |
The information below is not necessarily indicative of what our cash and cash equivalents and capitalization would have been had the separation been completed as of March 29, 2019. In addition, it is not indicative of our future cash and cash equivalents and capitalization. This table should be read in conjunction with “Unaudited Pro Forma Combined Financial Statements,” “Selected Historical Combined Financial Data,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Combined Financial Statements and notes thereto included elsewhere in this prospectus (amounts in millions, except per share data).
As of March 29, 2019 | ||||||
Historical | Pro Forma (5) | |||||
(unaudited) | ||||||
Cash and cash equivalents (1) | $ | — | $ | |||
Capitalization: | ||||||
Debt: | ||||||
Credit facility (2) | $ | — | $ | |||
Term Loan (3) | — | |||||
Total debt | — | |||||
Equity: | ||||||
Common stock ($0.01 par value), shares authorized; issued; outstanding, pro forma | — | |||||
Additional paid-in-capital | — | |||||
Retained earnings | — | |||||
Net Parent investment (4) | 4,967.6 | |||||
Accumulated other comprehensive income (loss) | (115.9 | ) | ||||
Noncontrolling interests | 3.2 | |||||
Total equity | 4,854.9 | |||||
Total capitalization | $ | 4,854.9 | $ | |||
(1) Concurrent with the date of separation, we expect to have $ in cash and cash equivalents as reflected on our pro forma combined balance sheet.
(2) On , we entered into a revolving credit agreement with a syndicate of banks providing for a five-year $250 million senior unsecured revolving credit facility.
(3) On , we entered into a term loan agreement with a syndicate of banks consisting of a three-year, $750 million senior unsecured term loan facility and a three-year, €675 million senior unsecured term loan facility.
(4) Reflects the net Parent investment impact as a result of the anticipated post-separation and post-offering capital structure.
(5) Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus) would increase (decrease) the net proceeds to us from this offering by $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of one million shares of common stock sold in this offering by us would increase (decrease) our net proceeds by $ million, assuming the initial public offering price of $ per share (the midpoint of the estimated public offering price range set forth on the cover page of this prospectus), remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by
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us. However, any such changes will not impact the cash retained by us following our payment to Danaher as described under “Use of Proceeds.”
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DILUTION
If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of common stock and the pro forma net tangible book deficit per share of our common stock after giving effect to the separation and this offering. Net tangible book deficit per share represents:
• | total assets less goodwill and other intangible assets; |
• | reduced by our total liabilities; and |
• | divided by the number of shares of our common stock outstanding. |
Dilution per share represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book deficit per share after giving effect to the separation and this offering. As of , 2019, after giving effect to the separation and this offering, our pro forma net tangible book deficit was approximately $ , or $ per share based on shares of our common stock outstanding immediately prior to this offering. This represents an immediate dilution of $ per share to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution per share assuming an initial public offering price per share at the midpoint of the price range on the cover of this prospectus:
Assumed initial public offering price per share of common stock | $ | |
Pro forma net tangible book deficit per share after giving effect to the separation | ||
Increase in pro forma net tangible book value per share of common stock attributable to new investors | ||
Pro forma net tangible book value per share of common stock, after giving effect to the separation and this offering | ||
Dilution per share of common stock to new investors in this offering | $ | |
A $1.00 increase/(decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus would not impact our pro forma net tangible book deficit or our pro forma net tangible book deficit per share but it would increase/(decrease) dilution per share to new investors in this offering by $1.00.
The following table summarizes, on a pro forma as adjusted basis as of March 29, 2019, after giving effect to this offering, the difference between our existing stockholder and new investors with respect to the number of shares of common stock purchased from us, the total consideration paid to us, or to be paid, and the average price per share paid by our existing stockholder or to be paid by new investors purchasing shares in this offering, at the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions:
Shares Purchased | Total Consideration | Average Price Per Share | |||||||
Number | Percent | $ in Millions | Percent | ||||||
Existing Stockholder (1) | % | $ | % | $ | |||||
New Investors | |||||||||
Total | 100% | $ | 100% | $ | |||||
(1) | Total consideration represents the pro forma book value of the net assets being contributed to us by Danaher in connection with the separation. |
If the underwriters exercise in full their option to purchase additional shares of our common stock, the pro forma as adjusted net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $ per share, and the dilution in pro forma net tangible book value per share to new investors purchasing shares of common stock in this offering would be $ per share.
The above discussion and tables are based on an assumed number of shares of our common stock outstanding immediately following this offering. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our stockholders.
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SELECTED HISTORICAL COMBINED FINANCIAL DATA
Set forth below are selected historical combined financial data of Danaher’s Dental segment for the periods indicated. We derived the combined statement of earnings data for the years ended December 31, 2018, December 31, 2017 and December 31, 2016, and the combined balance sheet data as of December 31, 2018 and December 31, 2017, from our historical audited Combined Financial Statements, which are included elsewhere in this prospectus. We derived the combined statement of earnings data for the three-month periods ended March 29, 2019 and March 30, 2018 and the combined balance sheet data as of March 29, 2019 from our unaudited Combined Financial Statements included elsewhere in this prospectus. We derived the audited combined balance sheet data as of December 31, 2016 from our historical audited Combined Financial Statements, which are not included in this prospectus. We derived the unaudited combined statement of earnings data for the fiscal years ended December 31, 2015 and December 31, 2014, and the unaudited combined balance sheet data as of March 30, 2018, December 31, 2015 and December 31, 2014 from the financial records of Danaher which are not included in this prospectus. We have prepared the unaudited Combined Financial Statements on the same basis as the audited Combined Financial Statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. Our historical results may not necessarily reflect our results of operations, financial position and cash flows for future periods or what they would have been had we been a separate, publicly-traded company during the periods presented.
We have historically operated as part of Danaher and not as a separate, publicly-traded company. Our Combined Financial Statements have been derived from Danaher’s historical accounting records and are presented on a carve-out basis. All sales and costs as well as assets and liabilities directly associated with our business activity are included as a component of the Combined Financial Statements. The Combined Financial Statements also include allocations of certain general, administrative, sales and marketing expenses and cost of sales from Danaher’s corporate office and from other Danaher businesses to us and allocations of related assets, liabilities, and Danaher’s investment, as applicable. The allocations have been determined on a reasonable basis; however, the amounts are not necessarily representative of the amounts that would have been reflected in the Combined Financial Statements had we been an entity that operated separately from Danaher during the periods presented. Per share data has not been presented since our business was wholly-owned by Danaher during the periods presented.
This selected historical combined financial data should be reviewed in combination with “Unaudited Pro Forma Combined Financial Statements,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Combined Financial Statements and accompanying notes included in this prospectus ($ in millions, except net earnings as a percent of sales).
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Three-Month Periods Ended | Year Ended December 31 | ||||||||||||||||||||||||||
March 29, 2019 | March 30, 2018 | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Selected Statement of Earnings Information: | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||
Sales | $ | 659.7 | $ | 672.6 | $ | 2,844.5 | $ | 2,810.9 | $ | 2,785.4 | $ | 2,736.3 | $ | 2,193.0 | |||||||||||||
Cost of sales | (296.6 | ) | (297.1 | ) | (1,242.7 | ) | (1,189.7 | ) | (1,184.3 | ) | (1,214.4 | ) | (1,079.5 | ) | |||||||||||||
Gross profit | 363.1 | 375.5 | 1,601.8 | 1,621.2 | 1,601.1 | 1,521.9 | 1,113.5 | ||||||||||||||||||||
Operating costs: | |||||||||||||||||||||||||||
Selling, general and administrative expenses | (274.9 | ) | (285.2 | ) | (1,131.4 | ) | (1,062.2 | ) | (1,055.5 | ) | (1,038.1 | ) | (730.1 | ) | |||||||||||||
Research and development expenses | (43.3 | ) | (41.7 | ) | (172.0 | ) | (172.4 | ) | (142.8 | ) | (133.8 | ) | (82.4 | ) | |||||||||||||
Operating profit | 44.9 | 48.6 | 298.4 | 386.6 | 402.8 | 350.0 | 301.0 | ||||||||||||||||||||
Nonoperating income (expense), net | 0.1 | 0.2 | 2.7 | 0.1 | (1.1 | ) | 0.5 | (1.3 | ) | ||||||||||||||||||
Earnings before income taxes | 45.0 | 48.8 | 301.1 | 386.7 | 401.7 | 350.5 | 299.7 | ||||||||||||||||||||
Income taxes | (7.1 | ) | (12.2 | ) | (70.4 | ) | (85.6 | ) | (129.7 | ) | (75.0 | ) | (95.9 | ) | |||||||||||||
Net earnings | $ | 37.9 | $ | 36.6 | $ | 230.7 | $ | 301.1 | $ | 272.0 | $ | 275.5 | $ | 203.8 | |||||||||||||
Net earnings as a percent of sales | 6 | % | 5 | % | 8 | % | 11 | % | 10 | % | 10 | % | 9 | % | |||||||||||||
As of | As of December 31 | ||||||||||||||||||||||||||
March 29, 2019 | March 30, 2018 | 2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||||||||
Selected Balance Sheet Information: | (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||||||||||||
Total assets | $ | 5,981.6 | $ | 6,033.8 | $ | 5,841.6 | $ | 5,992.8 | $ | 5,727.3 | $ | 5,807.4 | $ | 6,141.7 | |||||||||||||
Total liabilities | $ | 1,126.7 | $ | 955.6 | $ | 1,015.2 | $ | 998.2 | $ | 1,050.8 | $ | 1,018.6 | $ | 1,187.6 | |||||||||||||
Total equity | $ | 4,854.9 | $ | 5,078.2 | $ | 4,826.4 | $ | 4,994.6 | $ | 4,676.5 | $ | 4,788.8 | $ | 4,954.1 | |||||||||||||
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined financial statements consist of unaudited pro forma combined statements of earnings for the year ended December 31, 2018 and the three-month period ended March 29, 2019 and an unaudited pro forma combined balance sheet as of March 29, 2019. The unaudited pro forma combined statement of earnings for the year ended December 31, 2018 was derived from our historical audited Combined Financial Statements included elsewhere in this prospectus. The unaudited pro forma combined statement of earnings for the three-month period ended March 29, 2019 and the unaudited pro forma combined balance sheet as of March 29, 2019 were derived from our unaudited Combined Financial Statements included elsewhere in this prospectus. The pro forma adjustments give effect to the separation, this offering and related transactions, as described in the notes to the unaudited pro forma combined financial statements. The unaudited pro forma combined statements of earnings for the year ended December 31, 2018 and the three-month period ended March 29, 2019 give effect to the separation and this offering as if they had occurred on January 1, 2018, the first day of fiscal 2018. The unaudited pro forma combined balance sheet gives effect to the separation and this offering as if they had occurred on March 29, 2019, our latest balance sheet date. References to the “Company” in this section and in the following unaudited pro forma combined financial statements and our Combined Financial Statements included in this prospectus shall mean Danaher’s Dental segment.
The unaudited pro forma combined financial statements include certain adjustments that are necessary to present fairly our unaudited pro forma combined statement of earnings and unaudited pro forma combined balance sheet as of and for the periods indicated. The pro forma adjustments give effect to events that are (i) directly attributable to the transactions described below, (ii) factually supportable, and (iii) with respect to the unaudited pro forma combined statements of earnings, expected to have a continuing impact on us. The pro forma adjustments are based on assumptions that management believes are reasonable given the information currently available.
The unaudited pro forma combined financial statements give effect to the following:
• | the transfer to us from Danaher and Danaher affiliates pursuant to the separation agreement and related agreements of certain assets and liabilities that were not included in the historical Combined Financial Statements; |
• | the borrowing of $1.5 billion of term loans and the use of proceeds therefrom; |
• | the retention by Danaher pursuant to the separation agreement and related agreements of certain of our assets and liabilities that were included in our historical Combined Financial Statements; |
• | the tax matters agreement with Danaher that provides which company is responsible for tax liabilities prior to the separation, and the identification of net deferred tax assets between Danaher and us based on how the underlying assets and liabilities will be reported on each company’s respective financial statements and separate income tax returns; and |
• | the anticipated post-offering capital structure. |
The unaudited pro forma combined financial statements are subject to the assumptions and adjustments described in the accompanying notes.
In connection with the separation, we expect to enter into a transition services agreement with Danaher, pursuant to which Danaher and we will provide to each other certain specified services on a temporary basis, including various information technology, financial and administrative services. The charges for the transition services generally are expected to allow the providing company to fully recover all out-of-pocket costs and expenses it actually incurs in connection with providing the service, plus, in some cases, the allocated indirect costs of providing the services, generally without profit.
No adjustments have been included in the unaudited pro forma combined statements of earnings for additional annual operating costs. Although expenses reported in our Combined Statements of Earnings include allocations of certain Danaher costs (including corporate costs, shared services and other selling, general and administrative costs that benefit us), as a public company, we anticipate incurring additional recurring costs that could be materially different from the allocations of Danaher costs included within the historical Combined Financial Statements. These additional recurring costs are primarily for the following:
• | additional personnel costs, including salaries, benefits and potential bonuses and/or share-based compensation awards for staff additions to replace support provided by Danaher that is not covered by the transition services agreement; and |
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• | corporate governance costs, including board of director compensation and expenses, audit and other professional services fees, annual report and proxy statement costs, SEC filing fees, transfer agent fees, consulting and legal fees and stock exchange listing fees. |
Certain factors could impact the nature and amount of these separate public company costs, including the finalization of our staffing and infrastructure needs.
We expect these costs to range between approximately $ million to $ million per year. We have not adjusted the accompanying unaudited pro forma combined financial statements for any of these estimated costs as they are projected amounts based on estimates and, therefore, are not factually supportable.
The unaudited pro forma combined financial statements exclude certain nonrecurring internal costs that we expect to incur to implement certain new systems, while certain of our legacy systems are supported by Danaher under the transition services agreement. We estimate such costs will range between approximately $ million and $ million in each of 2020 and 2021.
The unaudited pro forma combined financial statements have been presented for informational purposes only. The pro forma information is not necessarily indicative of our results of operations or financial condition had the separation and the related transactions been completed on the dates assumed and should not be relied upon as a representation of our future performance or financial position as a separate public company.
The following unaudited pro forma combined financial statements should be read in conjunction with our historical Combined Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this prospectus.
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ENVISTA HOLDINGS CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
($ and shares in millions, except per share amount)
As of March 29, 2019 | |||||||
Historical | Pro Forma Adjustments | Pro Forma | |||||
ASSETS | |||||||
Current assets: | |||||||
Cash and equivalents | $ | — | $ | (a) | $ | ||
Trade accounts receivable, net | 456.6 | ||||||
Inventories: | |||||||
Finished goods | 177.2 | ||||||
Work in process | 33.9 | ||||||
Raw materials | 74.2 | ||||||
Total inventories | 285.3 | ||||||
Prepaid expenses and other current assets | 56.9 | (c) | |||||
Total current assets | 798.8 | ||||||
Property, plant and equipment, net of accumulated depreciation of $379.6 | 263.2 | ||||||
Other long-term assets | 266.9 | (c) | |||||
Goodwill | 3,301.0 | ||||||