DENTSPLY SIRONA Inc. 2018 Form 10-K Summary
Business context and reporting period
Dentsply Sirona is a global manufacturer of professional dental products, technologies and equipment, with additional healthcare consumable products. The filing covers the fiscal year ended December 31, 2018; fourth-quarter figures are provided in the annual filing but the filing is not a quarterly report. The Company operates through Technologies & Equipment and Consumables segments and sells in more than 120 countries.
- Dental products and technology represented approximately 91% of 2018 consolidated net sales.
- Approximately two-thirds of sales were generated outside the United States.
- ASC 606 revenue recognition was adopted effective January 1, 2018 using the modified retrospective method; prior periods were not restated.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net sales | $3,986.3 million | $3,993.4 million | (0.2%) |
| Net sales excluding precious metal content | $3,949.1 million | $3,952.9 million | (0.1%) |
| Gross profit | $2,067.8 million | $2,188.5 million | (5.5%) |
| Gross margin excluding precious metal content | 52.4% | 55.4% | (300 bps) |
| Operating income/(loss) | $(958.1) million | $(1,562.3) million | Improved $604.2 million |
| Net loss attributable to Dentsply Sirona | $(1,011.0) million | $(1,550.0) million | Improved $539.0 million |
| Diluted loss per share | $(4.51) | $(6.76) | Improved $2.25 |
| Adjusted net income | $454.5 million | $618.2 million | (26.5%) |
| Adjusted diluted EPS | $2.01 | $2.66 | (24.3%) |
| Cash flow from operations | $499.8 million | $601.9 million | (17.0%) |
| Capital expenditures | $182.5 million | $144.3 million | Increase of $38.2 million |
Reported results were heavily affected by a $1,085.8 million non-cash goodwill impairment charge, $179.2 million of indefinite-lived intangible impairment charges, and $221.0 million of restructuring and other costs. Excluding specified non-GAAP adjustments, adjusted operating income was $614.2 million, or a 15.5% margin, compared with $791.4 million and a 20.0% margin in 2017.
- Technologies & Equipment sales excluding precious metal content declined 2.9% to $2,098.4 million; segment operating income declined 38.1% to $255.6 million.
- Consumables sales increased 3.2% to $1,850.7 million; segment operating income increased 0.6% to $495.8 million.
- United States sales excluding precious metal content declined 7.1% to $1,269.2 million, while Europe increased 3.9% and Rest of World increased 3.1%.
- Fourth-quarter 2018 net sales were $1,059.7 million, operating income was $81.8 million and net loss attributable to Dentsply Sirona was $1.8 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $309.6 million at December 31, 2018, down from $320.6 million.
- Total debt, including current and long-term portions, was $1,575.5 million, compared with $1,620.8 million at December 31, 2017. Net debt to total capitalization increased to 20.8% from 16.6%.
- The Company had a $700.0 million unsecured revolving credit facility maturing in July 2023 and reported $662.8 million of unused credit lines at year-end.
- The Company was in compliance with debt covenants at December 31, 2018, including a maximum debt-to-total-capital ratio of 0.6 to 1.0 and a minimum operating income excluding depreciation and amortization to interest expense ratio of 3.0 times.
- Cash used in investing activities was $253.3 million, including $136.0 million for acquisitions and identifiable intangible assets and $182.5 million for capital expenditures.
- Cash used in financing activities was $249.8 million, including $250.2 million of share repurchases and $78.6 million of dividends.
- The Company repurchased 5.4 million shares for $250.2 million and had $749.8 million remaining under its repurchase authorization.
Material changes versus the prior comparable period
- Sales were broadly flat, but reported U.S. performance and Technologies & Equipment results weakened substantially.
- Distributor inventory changes associated with the transition involving Patterson and Henry Schein negatively affected reported 2018 sales growth by approximately $127 million. The Company estimated distributor inventory decreased by approximately $100 million in 2018, compared with an increase of approximately $27 million in 2017.
- Gross margin contracted by 300 basis points due primarily to higher manufacturing costs, unfavorable pricing and geographic mix, business-combination costs, product-line eliminations and dealer destocking.
- Goodwill and intangible asset balances declined materially following impairment charges. Net goodwill declined to $3,431.3 million from $4,539.2 million, and total identifiable intangible assets declined to $2,420.3 million from $2,800.7 million.
- Operating cash flow declined by $102.1 million, although working capital consumed only $4.0 million in 2018 compared with $149.3 million in 2017.
- The Company acquired OraMetrix for $120.0 million, with an additional $30.0 million subject to earn-out provisions. The acquisition was not material to 2018 consolidated sales or net loss.
- S&P lowered the Company’s long-term issuer credit rating to BBB from BBB+ on August 8, 2018.
Guidance, outlook, management commentary and risks
- The November 2018 restructuring plan targets 3% to 4% annualized topline growth, a 20% adjusted operating margin by the end of 2020, a 22% adjusted operating margin by 2022, and approximately $225 million of net annual cost savings by 2021.
- The plan includes an expected net workforce reduction of approximately 6% to 8% and approximately $275 million of one-time expenditures and charges through 2021. Expected 2019 restructuring cash payments were $115 million to $125 million.
- Management expected 2019 capital expenditures of approximately $165 million to $175 million and projected that divestitures of nonstrategic product lines would reduce 2019 sales by approximately $70 million.
- Goodwill impairment testing remains a significant risk. The Treatment Centers reporting unit had $292.4 million of goodwill at year-end and would not have exceeded carrying value under specified hypothetical sensitivity scenarios involving higher discount rates or lower fair value.
- Key risks include execution of the restructuring plan, continued competition and pricing pressure, distributor concentration and inventory changes, foreign exchange exposure, regulatory approvals, product liability and litigation, cybersecurity, supply interruptions, tax disputes and debt covenant or refinancing risk.
- The SEC Division of Enforcement requested documents and information concerning the Company’s accounting and disclosures; the Company stated that it was cooperating and could not predict the outcome.
- The IRS proposed adjustments related to a $546.0 million 2013 worthless-stock deduction, including a potential $17.1 million 2014 tax deficiency excluding interest. The Company disputed the proposed adjustments and had not accrued a liability.
- The Swedish Tax Agency disallowed certain interest expense deductions for 2013 through 2017 and expected to do so for 2018; the Company estimated potential additional tax expense of $41.0 million and was pursuing appeals.
- The Company stated that management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2018.
Important facts investors should verify
- Whether the restructuring plan achieves the targeted $225 million of annual savings, margin expansion and revenue growth, and the timing and total cost of the workforce reductions.
- Whether Technologies & Equipment sales and margins stabilize after distributor destocking and the shift from exclusive to non-exclusive distribution.
- The sensitivity of remaining goodwill and intangible assets to changes in revenue forecasts, operating margins, discount rates and competitive conditions.
- Cash generation after restructuring payments, capital expenditures, dividends, acquisitions and share repurchases.
- Debt maturities, refinancing plans, credit ratings and continued compliance with financial covenants.
- The ultimate outcomes and potential financial effects of the SEC inquiry, securities class actions, IRS dispute, Swedish tax dispute and other litigation.
- The comparability of GAAP results with management’s adjusted measures, particularly given the substantial impairment, restructuring and other excluded items.