DENTSPLY International Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2011. The company operated primarily as a global dental products manufacturer and distributor, with operations in more than 120 countries. Following the August 31, 2011 acquisition of Astra Tech, the company also expanded into dental implants and consumable medical devices. Astra Tech results were included for September 1–30, 2011.
Key financial metrics
| Metric | Three months ended Sept. 30, 2011 | Three months ended Sept. 30, 2010 | Nine months ended Sept. 30, 2011 | Nine months ended Sept. 30, 2010 |
|---|---|---|---|---|
| Net sales | $619.8 million | $541.8 million | $1,799.7 million | $1,652.8 million |
| Net sales excluding precious metals | $563.8 million | $494.3 million | $1,654.7 million | $1,510.5 million |
| Gross profit | $297.6 million | $272.8 million | $912.5 million | $842.4 million |
| Gross margin excluding precious metals | 52.8% | 55.2% | 55.1% | 55.8% |
| Operating income | $39.8 million | $90.4 million | $235.4 million | $284.7 million |
| Net income attributable to DENTSPLY | $60.6 million | $63.7 million | $203.9 million | $197.9 million |
| Diluted EPS | $0.42 | $0.44 | $1.42 | $1.35 |
Reported third-quarter operating margin was approximately 6.4%, compared with 16.7% in the prior-year quarter. Nine-month operating margin was approximately 13.1%, compared with 17.2%. The company reported a third-quarter tax benefit of $40.6 million, including a $47.7 million benefit from releasing a valuation allowance on previously unrecognized tax loss carryforwards. The nine-month effective tax rate was 0.5%, compared with 25.3% in 2010.
- Operating cash flow was $252.1 million for the first nine months, versus $256.1 million in the prior-year period.
- Capital expenditures were $45.5 million; full-year 2011 capital expenditures were expected to be approximately $70 million.
- Cash and cash equivalents declined to $81.9 million at September 30, 2011, from $540.0 million at December 31, 2010.
- Long-term debt, including the current portion, had a carrying value of approximately $1.83 billion and a fair value of approximately $1.86 billion. Long-term debt to total capitalization increased to 49.2% from 24.1% at year-end 2010.
- Total current assets were $1.09 billion and total current liabilities were $512.7 million. The company reported $338.0 million of commercial paper borrowings and $5.9 million outstanding under uncommitted short-term credit lines.
Material changes versus the prior comparable period
- Net sales increased 14.4% in the third quarter and 8.9% for the first nine months. Excluding precious metal content, sales increased 14.1% and 9.5%, respectively.
- Third-quarter sales growth excluding precious metals consisted primarily of 10.7% acquisition growth and 4.4% favorable currency translation; internal growth was negative 1.1%. Excluding Japan and orthodontics, internal growth was 3.6%.
- The Astra Tech acquisition contributed $50.9 million of sales and a $12.2 million operating loss during September. The transaction generated approximately $1.8 billion of acquisition-related cash outflow and added approximately $954.9 million of goodwill and $793.2 million of identifiable intangible assets on a preliminary basis.
- Gross margin excluding precious metals declined 2.4 percentage points in the quarter, primarily because $16.3 million of Astra Tech acquired-inventory fair-value adjustments was expensed. Nine-month gross margin declined 0.7 percentage points.
- SG&A increased 27.2% in the quarter and 16.4% year to date, reflecting Astra Tech operating costs, acquisition and integration expenses, higher amortization, product-launch spending, and orthodontic business continuity costs.
- Restructuring and other costs increased to $26.4 million in the quarter and $33.8 million year to date, versus $0.3 million and $5.3 million, respectively, in the prior-year periods. Third-quarter costs included $11.5 million of Astra Tech-related costs and $11.8 million of legal settlement costs.
- Interest expense increased materially because of acquisition financing. The company issued $1.0 billion of senior unsecured notes and entered into additional revolving and term-loan arrangements.
Guidance, outlook, commentary, risks, and unusual items
- Management’s long-term internal growth target was 4%–6%, but it expected growth below that range for the remainder of 2011 because of the Japan disaster and slower global economic conditions.
- A key Japanese supplier disruption affected orthodontic products representing approximately 9% of 2010 consolidated sales excluding precious metals. Management expected supply disruption through at least the first half of 2012, with the negative impact expected to peak in the fourth quarter of 2011.
- The orthodontic supply disruption reduced diluted EPS by approximately $0.05 in the third quarter, following an approximately $0.03 impact in the second quarter. The company incurred $2.0 million of year-to-date orthodontic business continuity costs and restructuring charges.
- Management expected Astra Tech to provide a positive product-mix impact on gross margins over the following year, but the acquisition remained subject to preliminary purchase-price valuations and integration risks.
- The company stated that its primary focus after the Astra Tech acquisition was debt reduction, although smaller tuck-in acquisitions remained possible.
- Litigation exposure included Cavitron-related class-action matters for which a reasonable loss range could not be estimated. Management did not believe the matters would materially affect financial position, but an unfavorable resolution could materially affect operating results.
- The company settled claims brought by Guidance Endodontics and recorded most of the $12.3 million of year-to-date legal settlement costs in restructuring and other costs.
- Foreign currency movements produced a $167.7 million year-to-date loss in other comprehensive income, contributing to accumulated other comprehensive loss of $146.7 million at September 30, 2011.
- The company reported effective disclosure controls as of September 30, 2011. Other than the Astra Tech acquisition, no material changes to internal control over financial reporting were reported.
Important facts for investors to verify
- Whether Astra Tech’s preliminary purchase-price allocation, goodwill, intangible valuations, inventory adjustments, and integration assumptions are subsequently revised.
- The timing and reliability of restored orthodontic supply from Japan, the success of alternative sourcing, and customer retention during the disruption.
- The company’s debt-reduction pace, interest burden, leverage covenant compliance, and refinancing requirements. The filing states that the company was in compliance with applicable covenants at September 30, 2011.
- The sustainability of earnings excluding the $47.7 million tax valuation-allowance benefit and other acquisition, restructuring, legal, amortization, and fair-value items.
- Cash conversion and working-capital trends, including reported inventory days of 105 and receivable days of 60 at September 30, 2011.
- Potential outcomes and financial exposure from the Cavitron litigation and other legal contingencies, for which the filing does not provide a clear reasonably estimable loss range.