Business Context and Reporting Period
DENTSPLY SIRONA Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2017. The company is a global dental products and technology manufacturer, with approximately 92% of sales from professional dental products. Reportable segments were Dental and Healthcare Consumables and Technologies; the company planned to begin reporting three segments in the quarter ending September 30, 2017.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Net sales | $992.7 million | $1,022.0 million | $1,893.2 million | $1,794.6 million |
| Net sales excluding precious metals | $983.0 million | $1,004.7 million | $1,872.4 million | $1,759.2 million |
| Gross profit | $544.2 million | $526.9 million | $1,036.2 million | $945.8 million |
| Gross margin excluding precious metals | 55.4% | 52.4% | 55.3% | 53.8% |
| Operating income (loss) | $(1,048.0) million | $121.2 million | $(963.8) million | $193.9 million |
| Net income (loss) attributable to DENTSPLY SIRONA | $(1,050.0) million | $105.4 million | $(990.2) million | $230.4 million |
| Diluted EPS | $(4.58) | $0.44 | $(4.31) | $1.11 |
| Operating cash flow | Not separately provided | Not separately provided | $208.7 million | $188.1 million |
Adjusted, non-GAAP diluted EPS was $0.65 for the second quarter, compared with $0.76 in the prior-year quarter. Adjusted diluted EPS for the first six months was $1.13, compared with $1.46 in the prior-year period. Adjusted operating margin was 19.8% in the second quarter and 18.3% for the first six months, compared with 23.1% and 22.7%, respectively.
Segment Performance
- Dental and Healthcare Consumables sales excluding precious metal content increased 3.4% in the second quarter and 4.7% for the six months. Segment adjusted operating income increased 6.9% in the quarter and 5.8% year to date.
- Technologies sales excluding precious metal content decreased 8.2% in the second quarter but increased 8.7% for the six months, primarily reflecting two additional months of consolidated Sirona results in 2017. Segment adjusted operating income declined 42.0% in the quarter and 28.3% for the six months.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $268.4 million at June 30, 2017, down from $383.9 million at December 31, 2016.
- Total debt, including current debt, was $1,608.9 million; long-term debt was $1,587.3 million. Estimated fair value of total debt was $1,611.6 million.
- Total net debt to total capitalization increased to 15.5% from 12.4% at year-end 2016.
- No borrowings were outstanding under the $500.0 million revolving credit facility. Available borrowing capacity under lines of credit was $545.0 million, including $41.9 million outstanding under uncommitted short-term lines.
- The company was in compliance with its debt covenants. An $8.8 million annual term-loan principal payment was due in August 2017.
- Six-month investing cash outflows included $64.8 million of capital expenditures and $125.2 million for acquisitions and intellectual property. Financing cash outflows included $150.3 million of share repurchases and $38.1 million of dividends.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales decreased 2.9% as reported and 2.2% excluding precious metal content. Constant-currency sales excluding precious metals declined 1.0%, with negative internal growth of 3.6%.
- The Technologies segment was adversely affected by lower equipment sales, distributor inventory reductions and a transition from exclusive to non-exclusive distribution arrangements. Management estimated distributor inventory changes reduced second-quarter sales by approximately $19 million and first-half sales by approximately $46 million.
- United States sales excluding precious metals declined 9.8% in the second quarter, while Europe increased 3.3% and the Rest of World increased 0.5%.
- Gross margin improved because merger-related fair-value adjustments rolled off, but selling, general and administrative expense increased 3.9% in the quarter and 10.5% for the six months.
- The company recorded a $1,092.9 million non-cash goodwill impairment charge related to the CAD/CAM, Imaging and Treatment Center reporting units in Technologies, and a $79.8 million impairment of certain tradenames and trademarks.
- Restructuring and other costs increased to $81.7 million in the quarter and $84.8 million for the six months, versus $3.6 million and $7.7 million, respectively, in the prior-year periods.
- Goodwill declined to $5,023.6 million from $5,952.0 million at year-end 2016, while total equity declined to $7,274.2 million from $8,125.9 million, primarily reflecting the reported net loss.
Guidance, Outlook, Risks and Unusual Items
- Management estimated that distributor inventory changes would reduce sales by approximately $10 million during the remainder of 2017. New distribution arrangements with Patterson and Henry Schein were expected to continue affecting equipment sales and inventory levels.
- Full-year 2017 capital expenditures were expected to be approximately $130 million to $150 million. Management estimated a full-year non-GAAP tax rate of 17.5%.
- The company estimated approximately $97 million of restructuring costs, primarily employee severance, to be incurred over the next two years as manufacturing, logistics and distribution networks are reorganized.
- Goodwill and intangible-asset impairment testing depends on revenue growth, operating margins, discount rates, market conditions and projected cash flows. Management stated that further deterioration or changes in assumptions could result in additional material impairment charges.
- The company was cooperating with an SEC Division of Enforcement investigation concerning accounting and disclosures, including transactions with a significant distributor. It was also continuing discussions with OFAC regarding export-control and economic-sanctions matters. Outcomes and potential financial impacts were not predictable.
- Pending litigation included individual claims related to Cavitron products. The company did not believe a loss was probable for disclosed litigation, but stated that unfavorable developments could materially affect results, financial position or liquidity.
- The company expected to adopt the revenue-recognition standard ASC 606 on January 1, 2018. Promotional and customer-loyalty programs were identified as primary affected areas, but the filing did not provide a clear quantified impact.
Most Important Facts for Investors to Verify
- Whether the Technologies segment stabilizes following the distribution-channel transition and whether the expected $10 million remaining distributor-inventory headwind is accurate.
- Whether the assumptions underlying the $1,092.9 million goodwill impairment and $79.8 million intangible impairment support the remaining asset balances, particularly the Technologies reporting units.
- Progress toward the approximately $97 million restructuring program and the timing and realization of expected efficiency benefits.
- Cash conversion, inventory levels and working-capital trends, including the increase in inventory days to 130 from 113 at December 31, 2016.
- The outcome and potential financial consequences of the SEC investigation and OFAC discussions.
- Future segment reporting changes, ASC 606 adoption effects and the sustainability of adjusted margins and earnings, which are non-GAAP measures.