DENTSPLY International Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. The filing is unaudited and covers DENTSPLY International Inc., the predecessor company to DENTSPLY Sirona. The company manufactures and distributes dental and consumable medical-device products in more than 120 countries; approximately 88% of second-quarter sales and 89% of year-to-date sales were professional dental products.
Key Financial Metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $761.0 million | $763.0 million | $1,493.1 million | $1,479.4 million |
| Net sales excluding precious-metal content | $716.0 million | $698.5 million | $1,388.6 million | $1,364.1 million |
| Gross profit | $415.0 million | $407.5 million | $803.2 million | $800.2 million |
| Gross margin, including precious-metal content | 54.5% | 53.4% | 53.8% | 54.1% |
| Gross margin, excluding precious-metal content | 58.0% | 58.3% | 57.8% | 58.7% |
| Operating income | $122.9 million | $108.9 million | $216.7 million | $196.1 million |
| Net income attributable to DENTSPLY | $87.2 million | $80.8 million | $158.9 million | $134.0 million |
| Diluted EPS | $0.60 | $0.56 | $1.10 | $0.93 |
| Adjusted diluted EPS | $0.66 | $0.62 | $1.18 | $1.14 |
| Operating cash flow | Not separately provided | Not separately provided | $131.9 million | $103.4 million |
Q2 reported sales declined 0.3%, but sales excluding precious-metal content increased 2.5%. Six-month reported sales increased 0.9%, while sales excluding precious-metal content increased 1.8%. Operating income rose 12.8% in the quarter and 10.5% year to date. Net income attributable to DENTSPLY increased 8.0% in the quarter and 18.6% year to date.
Business Performance and Segment Trends
- Worldwide internal sales growth excluding precious-metal content was 2.7% in Q2 and 2.1% for the first six months.
- Q2 regional internal growth was 6.2% in the United States, 1.0% in Europe and 0.9% in other regions. Six-month growth was 4.1%, 0.9% and 1.8%, respectively.
- Q2 segment sales excluding precious-metal content increased 3.4% in Dental Consumable and Laboratory Businesses, 3.8% in Select Distribution Businesses and 1.7% in Implants/Endodontics/Healthcare/Pacific Rim. Orthodontics/Canada/Mexico/Japan was essentially flat on a reported basis.
- Orthodontics/Canada/Mexico/Japan operating income increased $1.8 million in Q2 and $3.9 million year to date, reflecting improved operating leverage following prior supply disruptions.
- Implants/Endodontics/Healthcare/Pacific Rim operating income increased 1.8% in Q2 but was essentially flat year to date, as lower integration and marketing costs offset unfavorable implant-related sales mix.
Margins, Costs and Unusual Items
- Gross margin excluding precious-metal content declined 30 basis points in Q2 and 90 basis points year to date, primarily due to the Affordable Care Act medical-device excise tax and unfavorable sales mix.
- SG&A declined 2.1% in Q2 and 2.8% year to date. SG&A as a percentage of sales excluding precious-metal content improved by 190 basis points in Q2 and 200 basis points year to date, reflecting cost savings, lower marketing expenses and acquisition synergies.
- Restructuring and other costs were $2.2 million in Q2 and $2.8 million year to date, primarily related to location closures and integration activities.
- The Q2 effective tax rate was 20.9%, compared with 15.6% in the prior-year quarter. The prior-year quarter benefited from a $5.5 million favorable resolution of tax contingencies.
- The six-month 2013 effective tax rate was 14.1%, compared with 17.5% in 2012, aided by $9.4 million of tax benefits from U.S. federal legislative changes, a $1.4 million benefit from tax settlements and a $1.9 million benefit related to prior-year tax matters.
- Other expense, net increased to $4.2 million in Q2 and $7.1 million year to date, primarily from fair-value adjustments on cross-currency swaps not designated as hedges and currency transaction losses.
- Adjusted Q2 EPS was $0.66, excluding purchased-intangible amortization, restructuring and acquisition costs, derivative fair-value items, tax adjustments and affiliate fair-value gains. Adjusted six-month EPS was $1.18. These are non-GAAP measures.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $131.9 million, up 28% from $103.4 million in 2012. Working-capital investment included increases in receivables and inventories.
- Cash used in investing activities was $136.2 million, including $46.2 million of capital expenditures, $3.9 million for acquisitions and $87.3 million related to settlement of Swiss-franc net-investment hedges.
- Capital expenditures are expected to be approximately $100 million for full-year 2013.
- Cash and cash equivalents were $57.0 million at June 30, 2013, compared with $80.1 million at December 31, 2012.
- Total debt, including current and long-term portions, was approximately $1.54 billion on the balance sheet. Estimated fair value of total long-term debt, including current maturities, was $1.48 billion versus a carrying value of $1.45 billion.
- Net debt to total capitalization was 39.3% at June 30, compared with 39.0% at year-end 2012. Total borrowings increased by $19.9 million during the first six months.
- The company had a $500 million unsecured multi-currency revolving facility through July 2016 and a $500 million commercial-paper facility, with aggregate availability under those facilities limited to $500 million. Outstanding borrowings under the revolving facility were $84.7 million.
- Additional uncommitted short-term credit lines totaled $74.1 million, of which $5.9 million was outstanding. Total unused credit under the revolving and uncommitted facilities was $483.5 million. The company was in compliance with its debt covenants.
- The company repurchased 1.5 million shares for $62.3 million during Q2 and paid $16.9 million of dividends during the first six months. The quarterly dividend was $0.125 per share.
Outlook, Risks and Contingencies
- Management identifies a long-term internal growth target of 3% to 6%, but cautions that economic conditions, foreign exchange, dental-market trends, pricing, distributor inventory levels and strategic initiatives may cause results to vary.
- Management expects inventory levels may increase modestly for several more quarters before returning toward normal levels during 2014.
- Foreign exchange is significant because approximately two-thirds of sales are outside the United States. Currency movements affected reported sales, equity and derivative valuations.
- Management expects to continue acquisitions over time but stated that near-term attention would remain on integrating recent acquisitions and reducing associated debt.
- The company completed its annual goodwill impairment testing with no impairment identified. Goodwill was $2.16 billion at June 30, 2013, and identifiable intangible assets were $786.7 million.
- Pending Cavitron ultrasonic-scaler class actions in California and Pennsylvania remain unresolved. Management does not believe a loss is probable and cannot estimate a reasonable loss range; an unfavorable resolution could materially affect results.
- The company is cooperating with U.S. authorities regarding inquiries into export-control and economic-sanctions compliance. No claims had been made as of the filing date, but potential fines, penalties, injunctions or civil or criminal proceedings could be material.
- The company held $80.1 million of precious metals on consignment. Loss of these arrangements could require third-party financing to fund required inventory.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that there were no significant changes to previously disclosed risk factors.
Investor Verification Items
- Verify the sustainability of reported growth excluding precious-metal content, particularly the 2.7% Q2 internal-growth rate versus management’s 3% to 6% long-term target.
- Assess whether cost reductions and acquisition synergies can offset the medical-device excise tax, unfavorable sales mix and rising inventory and receivable days.
- Review debt maturities, commercial-paper reliance, foreign-currency exposure and the company’s ability to reduce debt while funding repurchases, dividends and acquisitions.
- Monitor the Cavitron litigation and export-control and sanctions inquiries for changes in probability, estimated exposure or regulatory action.
- Reconcile adjusted EPS to GAAP EPS and evaluate the recurring nature of excluded amortization, restructuring, acquisition, derivative and tax items.
- Assess goodwill and intangible-asset sensitivity to changes in forecast cash flows, discount rates, foreign exchange and implant-business performance.