DENTSPLY SIRONA Inc. — 2018 Third-Quarter Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global dental products and technology company operating through Technologies & Equipment and Consumables segments. The filing covers the unaudited quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Approximately 92% of sales were from professional dental products.
Key financial metrics
| Metric | Three months ended Sept. 30, 2018 | Three months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2018 | Nine months ended Sept. 30, 2017 |
|---|---|---|---|---|
| Net sales | $928.4 million | $1,009.2 million | $2,926.6 million | $2,902.4 million |
| Gross profit | $476.1 million | $559.0 million | $1,543.0 million | $1,595.2 million |
| Gross margin | 51.3% | 55.4% | 52.7% | 55.0% |
| Operating income (loss) | $45.5 million | $107.9 million | $(1,039.9) million | $(855.9) million |
| Net income (loss) attributable to DENTSPLY SIRONA | $28.0 million | $90.6 million | $(1,012.8) million | $(899.6) million |
| Diluted EPS | $0.13 | $0.39 | $(4.50) | $(3.92) |
| Cash flow from operations | Not separately provided | Not separately provided | $297.6 million | $373.0 million |
Third-quarter sales excluding precious-metal content were $920.6 million, down 7.9% year over year. Constant-currency sales declined 5.9%, including a 6.5% decline in internal sales. Adjusted operating income was $120.2 million, or 13.0% of sales excluding precious-metal content, versus $211.7 million, or 21.2%, in the prior-year quarter. Adjusted EPS was $0.38 versus $0.70.
At September 30, 2018, cash and cash equivalents were $233.1 million. Total debt, based on current and long-term debt reported on the balance sheet, was $1,729.6 million, and net debt to total capitalization was 22.5%, compared with 16.6% at December 31, 2017. The company had $131.0 million of commercial paper outstanding, no borrowings under its $700.0 million revolving facility, and $595.3 million of unused credit capacity. The company was in compliance with debt covenants.
Investing cash outflows included $130.6 million of capital expenditures and $130.5 million for acquisitions and equity investments. Financing cash outflows included $250.2 million of treasury-stock purchases and $59.1 million of dividends. Cash declined by $87.5 million during the first nine months, to $233.1 million.
Material changes versus the prior comparable period
- Third-quarter net sales decreased 8.0%; constant-currency sales decreased 5.9%. Technologies & Equipment sales excluding precious-metal content declined 11.2%, while Consumables declined 3.9%.
- Technologies & Equipment segment adjusted operating income fell 62.4% to $47.8 million. Consumables segment adjusted operating income fell 15.5% to $109.7 million.
- Gross margin excluding precious-metal content declined 420 basis points in the quarter and 230 basis points year to date, primarily because of unfavorable manufacturing costs, dealer destocking, product mix, pricing, and business-combination-related costs.
- Management estimated that distributor inventory changes related to the transition from exclusive to non-exclusive equipment distribution reduced first-nine-month sales by approximately $75 million and were expected to reduce full-year 2018 reported sales growth by approximately $140 million to $145 million.
- European distribution-center relocation and service-level problems reduced third-quarter sales by approximately $20 million. Management expected only partial recovery in the fourth quarter, with full service levels potentially not returning until early 2019.
- The company recorded $1,085.8 million of goodwill impairment and $179.2 million of indefinite-lived intangible-asset impairment during the first nine months. These non-cash charges contributed substantially to the reported year-to-date loss.
- Cash flow from operations declined $75.4 million year over year, primarily because of payments of accrued liabilities and higher inventory levels, partly offset by lower accounts receivable.
- The company acquired OraMetrix on May 1, 2018, for $120.0 million, with an additional $30.0 million subject to earn-out provisions. The acquisition was not material to third-quarter sales or net income.
Guidance, outlook, management commentary, risks and unusual items
On November 5, 2018, after the quarter ended, the board approved a restructuring plan intended to support revenue growth, margin expansion, and organizational simplification. Management projected 3% to 4% annualized topline growth, a 20% adjusted operating margin by the end of 2020, a 22% adjusted operating margin by 2022, and $200 million to $225 million of annual net cost savings by 2021. The company expects approximately $275 million of one-time expenditures and charges and cautioned that the targets may not be achieved. The plan includes an expected 6% to 8% reduction in the global workforce.
Management had achieved approximately $50 million of savings under its earlier cost-reduction initiative through September 30, 2018 and expected an additional approximately $20 million through year-end.
Future results remain exposed to distributor inventory reductions, competitive pressure from lower-priced products, execution of distribution changes, European service disruptions, foreign-exchange movements, product mix and pricing, and the success of restructuring and integration initiatives. Further goodwill or intangible-asset impairments remain possible; the filing identifies particular sensitivity in the Treatment Centers reporting unit, whose goodwill was $292.6 million at September 30, 2018.
The SEC Division of Enforcement requested documents and information concerning the company’s accounting and disclosures; the company is cooperating and cannot predict the outcome. The IRS proposed disallowing a $546 million worthless-stock deduction and penalties of $38 million to $74 million. The company had not accrued a liability, believed its position was more likely than not to be sustained, but stated that an adverse outcome could materially affect earnings, financial position, and liquidity.
Tax accounting for the Tax Cuts and Jobs Act remained provisional. The estimated cash liability for deemed repatriation of foreign earnings was approximately $1.0 million, but additional liabilities could be recorded. The company had also not finalized its GILTI accounting policy.
Most important facts for investors to verify
- Whether distributor inventory destocking and the transition to non-exclusive equipment distribution normalize as projected.
- Recovery of European distribution and shipment service levels and the amount of sales recovered in the fourth quarter and early 2019.
- Execution, timing, cash costs, workforce impact, and realized savings from the restructuring plan.
- Potential additional goodwill or intangible-asset impairments, particularly if forecasts, margins, discount rates, or market conditions deteriorate.
- Resolution of the SEC inquiry and IRS proposed tax adjustment, including any resulting financial statement or liquidity impact.
- Liquidity after share repurchases, dividends, acquisitions, restructuring expenditures, and the company’s increased net-debt ratio.
- Reconciliation of reported GAAP results to adjusted results, given the substantial impairment, restructuring, amortization, and other excluded items.