DENTSPLY International Inc. — Q1 2010 Form 10-Q Summary
Reporting period: Three months ended March 31, 2010, compared with the three months ended March 31, 2009. The filing identifies the registrant as DENTSPLY International Inc.; the provided metadata refers to DENTSPLY Sirona Inc. The interim financial statements are unaudited and prepared under U.S. GAAP.
Business Context
DENTSPLY described itself as a global dental-products company operating in more than 120 countries. Approximately 97% of sales came from professional dental products, including consumables, laboratory products, implants, endodontic and orthodontic products, and related equipment.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $545.9 million | $506.9 million | +7.7% |
| Net sales excluding precious-metal content | $497.5 million | $465.6 million | +6.8% |
| Gross profit | $282.0 million | $265.7 million | +6.1% |
| Gross margin | 51.7% | 52.4% | Down 0.7 points |
| Gross margin excluding precious-metal content | 56.7% | 57.1% | Down 0.4 points |
| Operating income | $89.3 million | $86.2 million | +3.7% |
| Operating margin | 16.4% | 17.0% | Down approximately 0.6 points |
| Net income attributable to DENTSPLY | $61.8 million | $61.7 million | +0.2% |
| Diluted EPS | $0.41 | $0.41 | Flat |
| Cash flow from operations | $36.5 million | $10.6 million | +243% |
Net sales excluding precious-metal content increased 2.7% on a constant-currency basis, including 2.5% internal growth and 4.1% currency translation. Precious-metal content increased to $48.4 million from $41.3 million, largely reflecting price volatility and pass-through sales.
Adjusted non-U.S. GAAP earnings increased to $65.5 million, or $0.44 per diluted share, from $64.1 million, or $0.43 per diluted share. Adjustments primarily excluded restructuring and other costs, acquisition-related activity, and income-tax adjustments.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $405.0 million at March 31, 2010, down from $450.3 million at December 31, 2009.
- Current assets were $1.18 billion versus current liabilities of $327.4 million, implying substantial short-term liquidity.
- Total debt was approximately $476.5 million at fair value, consisting of $18.9 million of current debt and $457.6 million of long-term debt on the balance sheet.
- Long-term debt to total capitalization increased to 19.8% from 19.2% at year-end 2009.
- Operating cash flow benefited primarily from improved working capital. Investing cash use was $15.7 million, including $8.0 million of capital expenditures and $7.7 million for acquisitions.
- Financing cash use was $29.0 million, including $41.4 million for share repurchases and $7.4 million of dividends paid, partly offset by net borrowing activity.
- Management expected full-year 2010 capital expenditures of $70 million to $80 million.
- The company had aggregate unused credit availability of approximately $554.6 million under revolving and uncommitted short-term facilities and was in compliance with applicable covenants at March 31, 2010.
Material Changes Versus Q1 2009
- Sales growth was broad-based, but currency translation contributed materially to reported growth. Constant-currency sales increased 2.7%.
- U.S., Germany and certain European consumables sales excluding precious-metal content increased 8.1%, with segment operating income up 32.4% to $44.9 million.
- France, the U.K., Italy and other European, CIS, Middle East, Africa and Pacific Rim sales increased 4.9% reported but declined 1.8% on a constant-currency basis; segment operating income declined to a $0.1 million loss from $2.9 million of income.
- Canada, Latin America, Endodontics and Orthodontics sales increased 8.3%, while segment operating income declined 4.2% to $48.0 million due to higher sales and marketing costs and unfavorable Japanese-yen-denominated material purchases.
- Dental Laboratory, Implants and Non-Dental sales increased 5.2%, with segment operating income broadly stable.
- Restructuring and other costs increased to $4.7 million from $1.6 million, primarily reflecting legal matters, impairments and facility consolidation or reorganization activities.
- The company completed two acquisitions and one earn-out payment for $7.7 million in cash. Preliminary purchase-price allocations included $4.3 million of goodwill, with finalization expected in the second quarter.
- The company issued $250 million of 4.11% senior notes and entered into a Swiss-franc-denominated term loan, refinancing maturing or existing borrowings.
- The company repurchased 1.2 million shares for $41.4 million at an average price of $33.59, compared with $4.7 million of repurchases in Q1 2009.
Outlook, Risks and Unusual Items
- Management stated that its long-term sustainable internal growth expectation was 4% to 6%, but expected growth to remain below that range in the near term because of economic conditions.
- Management continued to emphasize cost control, facility and operational consolidation, technology, process improvements, product innovation and acquisitions.
- Key operating risks include foreign-exchange volatility, economic and dental-market conditions, competitive and regulatory pressures, technological change, commodity costs, variable interest rates and integration of acquisitions.
- Foreign currency translation produced a $77.2 million other comprehensive loss in Q1 2010. Derivative gains partially offset the impact, but accumulated other comprehensive income declined to $34.6 million from $83.5 million at year-end.
- Guidance Endodontics litigation resulted in an approximately $4.0 million compensatory and $40.0 million punitive jury verdict, formally entered in April 2010. DENTSPLY planned to challenge the verdict and stated that it did not expect a material adverse effect on financial position, although an unfavorable resolution could materially affect U.S. GAAP operating results.
- Other litigation included Cavitron-related class-action matters. The filing stated that a reasonable loss range could not be estimated for the litigation matters except as otherwise disclosed.
- Potential income-tax settlements or statute expirations over the following twelve months could affect approximately $2.1 million of unrecognized tax benefits.
- The company relied on precious-metal consignment arrangements totaling $108.2 million. Loss of those arrangements could require additional financing for precious-metal inventory.
- The company adopted new variable-interest-entity guidance on January 1, 2010; management reported no material impact.
Investor Verification Checklist
- Verify the registrant identity and corporate-history relationship between DENTSPLY International Inc. in the filing and DENTSPLY Sirona Inc. in the metadata.
- Reconcile reported sales growth with constant-currency and internal-growth measures, particularly the impact of precious-metal content and foreign exchange.
- Monitor gross-margin pressure, unfavorable product mix and the performance of the weaker European and Canada/Latin America/Endodontics/Orthodontics segments.
- Review the maturity and refinancing status of the credit facilities scheduled to mature in May 2010, as well as covenant compliance.
- Track the Guidance Endodontics and Cavitron litigation, including any subsequent rulings, settlements or reserves.
- Assess the effect of the $41.4 million share repurchase program, new debt issuance, acquisition spending and planned $70 million to $80 million of capital expenditures on cash generation and leverage.
- Evaluate foreign-exchange, interest-rate, commodity and derivative exposures, including the substantial cross-currency swap liabilities.