DENTSPLY SIRONA Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2020. DENTSPLY SIRONA is a global dental and healthcare consumables company operating through Technologies & Equipment and Consumables segments. Professional dental products represented approximately 88% of sales. The period was materially affected by COVID-19-related dental office closures, reduced procedures, social distancing, and customer payment delays.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $490.6 million | $1,009.4 million | $1,364.9 million | $1,955.6 million |
| Gross profit | $176.1 million | $540.8 million | $643.9 million | $1,040.5 million |
| Gross margin | 35.9% | 53.6% | 47.2% | 53.2% |
| Operating income (loss) | $(104.3) million | $67.5 million | $(229.1) million | $114.8 million |
| Net income (loss) attributable to DENTSPLY SIRONA | $(95.4) million | $36.4 million | $(235.3) million | $75.6 million |
| Diluted EPS | $(0.44) | $0.16 | $(1.07) | $0.34 |
| Operating cash flow | Not separately provided | Not separately provided | $164.4 million | $174.4 million |
Q2 sales declined 51.4% year over year, including a 49.9% organic decline. Six-month sales declined 30.2%, including a 27.8% organic decline. Q2 segment sales were $303.9 million for Technologies & Equipment, down 45.6%, and $186.7 million for Consumables, down 58.6%. Six-month segment sales were $824.2 million and $540.7 million, respectively.
Q2 segment adjusted operating income was a loss of $21.4 million, compared with income of $217.8 million in the prior-year quarter. Six-month segment adjusted operating income was $151.3 million, compared with $395.3 million in 2019.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $1,109.1 million at June 30, 2020, compared with $404.9 million at December 31, 2019.
- Total debt was approximately $2,183.0 million, including $2,182.7 million of long-term debt and $0.3 million of current debt, versus approximately $1,435.4 million at year-end 2019.
- The company issued $750.0 million of 3.25% senior unsecured notes due June 1, 2030. Net proceeds were $748.4 million before issuance fees and were used principally to repay a $700.0 million revolving-credit draw.
- Available borrowing capacity was $1,156.1 million. The company reported no outstanding borrowings under its credit agreements through the filing date, although $0.1 million was outstanding under other short-term lines at June 30.
- The company was in compliance with debt covenants and stated that it expects sufficient liquidity and covenant compliance for the next twelve months. Net debt to total capitalization was 18.8%, compared with 16.8% at December 31, 2019.
- Six-month investing cash flow was positive $19.4 million, including $57.5 million of derivative proceeds and $38.8 million of capital expenditures. Full-year critical capital expenditures were expected to be approximately $75 million to $100 million.
- The company paid $44.0 million of dividends and repurchased $140.0 million of stock under an accelerated share repurchase agreement, receiving 3.7 million shares at an average price of $38.25 per share.
Material changes versus the prior comparable period
- COVID-19 drove substantial demand reductions across all regions and both operating segments. Sales were lowest in April and improved in May and June as dental practices reopened, but remained below prior-year levels.
- Gross margin fell 1,770 basis points in Q2 and 603 basis points for the six months, primarily from lower volume and unfavorable manufacturing variances.
- SG&A declined in dollars but increased to 56.9% of Q2 sales from 42.7%, and to 49.3% for the six months from 44.1%, because sales fell faster than expenses.
- The company recorded a $156.6 million goodwill impairment charge and a $38.7 million indefinite-lived intangible asset impairment charge in the first quarter, both associated primarily with the Equipment & Instruments reporting unit and COVID-19-related forecast changes.
- Accounts receivable days increased to 88 from 62 at December 31, 2019, and inventory days increased to 132 from 116, reflecting lower sales and customer disruption. The inventory valuation reserve increased to $102.0 million from $85.0 million.
- The company terminated its entire net investment hedge portfolio on April 7, receiving $48.1 million in cash, which increased near-term liquidity but reduced expected hedge-related income thereafter.
Guidance, outlook, risks, and unusual items
- Management expected COVID-19 to continue having a negative material impact on 2020 sales and results, with the duration and pace of recovery uncertain. The company could not estimate when sales or operations would return to pre-pandemic levels.
- Cost actions included furloughs or reduced hours affecting approximately 52% of the workforce, salary reductions of up to 25% for many non-furloughed employees, hiring and travel restrictions, reduced marketing and discretionary spending, and delayed capital expenditures.
- In July 2020, the restructuring program was expanded. Total program charges were expected to be approximately $375 million, with annual savings of approximately $250 million. The company expected incremental headcount reductions of 6% to 7% in addition to the original 6% to 8% plan.
- Following quarter-end, the company announced closure of its traditional orthodontics business and portions of its laboratory business. It expected $80 million to $90 million of additional charges, mostly during the remainder of 2020, including $45 million to $55 million of non-cash inventory and fixed-asset charges. Workforce reductions were expected at approximately 4% to 5%, with no significant sales impact expected in Q3 and Q4.
- Goodwill and intangible asset valuations remain sensitive to revenue forecasts, operating margins, discount rates, and the pandemic. One reporting unit with approximately $1.1 billion of goodwill was near book value under sensitivity analyses; additional impairment charges could be material.
- The SEC Division of Enforcement requested information regarding the company’s accounting and disclosures. The company is cooperating and stated that it cannot predict the outcome or potential material effect.
- Other contingencies include securities and derivative litigation, an IRS dispute involving a proposed $17.1 million 2014 tax deficiency excluding interest, and a Swedish tax matter involving approximately $41.0 million of potential additional tax expense. No liability was accrued for these tax disputes.
- S&P Global Ratings affirmed the company’s BBB issuer rating but changed the outlook from stable to negative.
Important facts for investors to verify
- Whether dental demand and manufacturing utilization recovered as expected after June 30, 2020, and whether subsequent COVID-19 restrictions caused renewed disruption.
- The timing, cash cost, and realized savings from the expanded restructuring plan and business closures.
- Potential future goodwill, intangible-asset, inventory, or other impairment charges.
- Compliance with debt covenants under prolonged weak operating conditions and the availability of committed credit facilities.
- Customer payment performance, accounts receivable aging, inventory levels, and valuation reserves.
- Developments in the SEC investigation, securities litigation, IRS dispute, and Swedish tax proceedings.
- The effect of higher debt and the 3.25% senior notes on interest expense and free cash flow.