DENTSPLY International Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2014. DENTSPLY International manufactured and distributed dental consumables, laboratory and specialty products, and consumable medical devices in more than 120 countries. Professional dental products represented approximately 88% of sales. The company is now known as DENTSPLY SIRONA Inc.
Financial performance and key metrics
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $708.2 million | $704.0 million | $2,203.6 million | $2,197.1 million |
| Net sales excluding precious metals | $681.5 million | $669.4 million | $2,101.7 million | $2,058.0 million |
| Gross profit | $388.1 million | $376.4 million | $1,206.7 million | $1,179.6 million |
| Operating income | $109.6 million | $105.0 million | $342.3 million | $321.7 million |
| Net income attributable to DENTSPLY | $75.3 million | $79.9 million | $238.1 million | $238.8 million |
| Diluted EPS | $0.52 | $0.55 | $1.65 | $1.65 |
| Operating cash flow | Not separately provided | Not separately provided | $367.8 million | $258.3 million |
Third-quarter net sales increased 0.6% on a reported basis and 1.8% excluding precious metals. Worldwide constant-currency sales growth was 3.0%, comprising 2.4% internal growth and 0.6% acquisition growth. Nine-month sales excluding precious metals increased 2.1%, with 1.7% constant-currency growth.
Gross margin was 54.8% of reported sales in the third quarter and 57.4% excluding precious metals, compared with 53.5% and 56.2%, respectively, in the prior-year quarter. The nine-month operating margin was 15.5%, up from 14.6% in 2013. Adjusted diluted EPS was $0.62 for the quarter and $1.90 for the nine-month period, compared with $0.57 and $1.75, respectively, in the prior-year periods; these are non-GAAP measures.
Liquidity, debt and capital resources
- Cash and cash equivalents were $97.7 million at September 30, 2014, compared with $75.0 million at December 31, 2013.
- Total debt was approximately $1.28 billion, including $115.3 million of current notes payable and current long-term debt and $1.17 billion of long-term debt. Estimated fair value of total debt was $1.31 billion.
- Net debt to total capitalization improved to 32.2% from 35.2% at year-end 2013.
- The company had $567.7 million of unused credit lines and was in compliance with all debt covenants.
- Operating cash flow was $367.8 million; investing cash use was $76.4 million, including $73.0 million of capital expenditures; financing cash use was $264.4 million.
- Capital expenditures were expected to total approximately $110 million for full-year 2014.
- The company repurchased 1.5 million shares for $70.8 million during the first nine months and paid $27.9 million in dividends.
Material changes versus the prior comparable period
- Reported revenue was broadly flat because lower precious-metal content and unfavorable currency translation offset underlying growth.
- Gross profit increased 3.1% in the quarter and 2.3% year to date, supported by favorable pricing and product mix.
- Third-quarter operating income increased 4.3%; nine-month operating income increased 6.4%.
- Net income attributable to DENTSPLY declined 5.7% in the quarter and 0.3% year to date. Diluted quarterly EPS declined from $0.55 to $0.52, while nine-month diluted EPS remained $1.65.
- The effective tax rate rose to 21.8% in the quarter and 22.6% year to date, from 14.0% and 14.1%, respectively, primarily because of changes in earnings mix and favorable prior-year tax items.
- Operating cash flow increased $109.5 million year to date, primarily due to lower cash taxes and more favorable working-capital movements.
- Segment performance was mixed: nine-month sales excluding precious metals increased 6.7% in Dental Consumables, declined 0.9% in Dental Specialty and Laboratory, and increased 5.3% in Healthcare and Emerging Markets.
- Goodwill declined to $2.16 billion from $2.28 billion at year-end, principally because of foreign exchange effects. No goodwill or indefinite-lived intangible impairment was recorded.
Guidance, outlook, risks and unusual items
- Management described long-term dental-market growth expectations of approximately 3% to 6% annually and targets a slight premium to market growth. It also targets adjusted operating margins of 20% over time, but provided no formal near-term earnings guidance.
- Management expects continued operational-efficiency initiatives and periodic restructuring charges. Proposed German laboratory and manufacturing reorganization activities could result in additional costs.
- The company expects inventory levels, which had been elevated for operational transitions, to return gradually toward normal levels by the end of 2015.
- Foreign exchange remains a significant risk. The third quarter included a $198.6 million after-tax decline in other comprehensive income, primarily from foreign-currency translation losses.
- Key market risks include foreign exchange, interest rates, commodity prices, economic weakness in Europe and the CIS region, regulatory compliance, and execution of product innovation and acquisitions.
- Pending matters include product-related class actions, a False Claims Act qui tam action, and government inquiries concerning export controls and economic sanctions. Management did not believe a loss was probable and could not estimate a reasonable loss range, but an unfavorable outcome could materially affect results.
- Approximately $23.6 million of unrecognized tax benefits could be affected by settlements or resolutions within the following 12 months; approximately $7.0 million would affect the effective tax rate if recognized.
- A contractual purchase of the remaining shares of a variable-interest entity was expected to require cash later in 2014 or early 2015; the filing does not provide a clear final purchase price.
- The company adopted two accounting standards in 2014 without material impact. It expected to adopt the new revenue standard no later than the quarter ended March 31, 2017, but had not determined its impact.
Important facts for investors to verify
- Reconcile reported revenue growth with constant-currency growth and the decline in precious-metal content.
- Assess whether margin expansion and adjusted EPS growth are sustainable after excluding amortization, restructuring, acquisition, tax and fair-value items.
- Monitor tax-rate normalization relative to the unusually low 2013 rate and the resolution of unrecognized tax benefits.
- Review debt maturities, refinancing plans for current obligations, covenant compliance and the availability of the $500 million revolving facility.
- Evaluate foreign-exchange exposure, the substantial accumulated other comprehensive loss, and the effectiveness of hedging activities.
- Track the proposed German restructuring, related charges, laboratory-business performance and goodwill sensitivity at the identified reporting units.
- Follow the disclosed litigation and export-control investigations, for which the filing states that potential losses cannot currently be estimated.