DENTSPLY International Inc. — Fiscal 2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013. The registrant was DENTSPLY International Inc. (now DENTSPLY SIRONA Inc.). The company designs, manufactures and markets professional dental consumables, laboratory products, specialty dental products and consumable medical devices in more than 120 countries. Approximately 88% of 2013 net sales, excluding precious metal content, came from dental products, and approximately 67% came from customers outside the United States.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $2,950.8 million | $2,928.4 million | 0.8% |
| Net sales excluding precious metal content | $2,771.7 million | $2,714.7 million | 2.1% |
| Gross profit | $1,577.4 million | $1,556.4 million | 1.3% |
| Operating income | $419.2 million | $381.9 million | 9.7% |
| Operating margin | 14.2% | 13.0% | +120 basis points |
| Net income attributable to DENTSPLY | $313.2 million | $314.2 million | Down $1.0 million |
| Diluted EPS | $2.16 | $2.18 | Down $0.02 |
| Operating cash flow | $417.8 million | $369.7 million | 13.0% |
| Capital expenditures | $100.3 million | $92.1 million | Up $8.3 million |
Gross margin was 53.5% on reported sales and 56.9% excluding precious metal content, compared with 57.3% on the latter basis in 2012. Management attributed the decline in the adjusted gross margin primarily to the medical device excise tax under the Affordable Care Act. Adjusted operating margin, excluding precious metals and certain other items, increased to 17.6% from 17.5%.
At December 31, 2013, cash and cash equivalents were $75.0 million, total debt was approximately $1.48 billion, and net debt represented approximately 35.3% of total capitalization, compared with 39.0% in 2012. The company had $469.7 million of unused credit lines and was in compliance with its debt covenants. Long-term debt, including the current portion, was $1.37 billion.
Material changes versus the prior comparable period
- Reported sales increased modestly, while sales excluding precious metal content grew 2.1%; internal growth was 1.9%, acquisition growth was 0.1%, and currency translation contributed 0.1%.
- Constant-currency growth was 3.8% in the United States, 0.4% in Europe and 2.6% in all other regions.
- Operating income improved despite lower gross margin because SG&A expense declined $3.8 million and restructuring costs fell to $13.4 million from $25.7 million.
- Net income and diluted EPS were slightly lower, primarily reflecting a substantially higher effective tax rate of 14.1% versus 2.7% in 2012. The 2012 rate benefited from significant tax restructuring and other tax benefits.
- Operating cash flow reached a company record, although receivable days increased from 53 to 56 and inventory days increased from 106 to 114. Management expects inventory to remain somewhat elevated through 2014 before normalizing by the end of 2015.
- The company completed the integration of regional sales and marketing organizations for DENTSPLY Implants and continued efficiency initiatives, including facility consolidation and planned in-sourcing.
- Two businesses were acquired in November 2013 for total consideration of approximately $62.3 million, with preliminary goodwill of $52.9 million. The acquisitions were immaterial to 2013 sales and earnings.
Guidance, outlook, commentary, risks and unusual items
Management described the long-term global dental market growth opportunity as approximately 3% to 6% annually and targets growth modestly above the market. The filing does not provide formal 2014 revenue or EPS guidance. Management expects 2014 capital expenditures of approximately $120 million to $130 million and intends to fund operations, debt service, repurchases and acquisitions with operating cash flow, cash and available credit.
- The company expects continued restructuring and efficiency actions; related charges could be material, and expected savings may not be fully realized.
- International exposure creates material foreign-exchange risk; approximately two-thirds of sales are outside the United States.
- Competition, changing dental utilization, reimbursement policies, regulatory approvals, product quality claims, recalls, supplier concentration and technological obsolescence could affect results.
- The company received subpoenas concerning export controls and economic sanctions compliance and was cooperating with U.S. authorities. The ultimate outcome and financial impact were not determinable.
- A January 2014 qui tam complaint alleged improper marketing activities that allegedly caused false reimbursement claims. The company stated that a loss was not probable and that a reasonable loss range could not be estimated.
- The company was required to purchase the remaining shares of a variable-interest entity during 2014 for an expected amount of approximately €62.0 million, subject to adjustments.
- Goodwill and indefinite-lived intangible impairment tests produced no impairment in 2013, but the company identified approximately $1.6 billion of goodwill in closely monitored implant and healthcare reporting units.
- Precious metal consignment inventory had a market value of $80.8 million. Loss of consignment facilities could create financing and inventory valuation risks.
Most important facts for an investor to verify
- Reconcile GAAP sales, profit and cash flow with non-GAAP measures excluding precious metal content and adjusted earnings.
- Assess the sustainability of the 2013 operating-margin improvement after integration, restructuring and cost-saving benefits.
- Review debt maturities, covenant requirements, variable-rate exposure and the company’s ability to refinance the $204.7 million of debt scheduled for 2014.
- Monitor working-capital trends, particularly inventory days, receivable days and cash conversion.
- Evaluate the tax rate normalization risk given the unusually low 2012 effective tax rate and significant tax carryforwards and valuation allowances.
- Review the status and potential exposure of the export-control inquiries, qui tam litigation, Cavitron-related litigation and the variable-interest-entity purchase obligation.
- Assess goodwill and intangible-asset sensitivity to slower growth, higher discount rates and continued competition in implants and healthcare.