DENTSPLY SIRONA Inc. — Q1 2024 Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global dental products and technology manufacturer with four reportable segments: Connected Technology Solutions, Essential Dental Solutions, Orthodontic and Implant Solutions, and Wellspect Healthcare. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The company noted that first-quarter results are seasonally weaker than the second and fourth quarters.
Financial performance and key metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $953 million | $978 million | Down 2.6%; organic sales down 1.9% |
| Gross profit | $506 million | $519 million | Down 2.5% |
| Gross margin | 53.1% | 53.1% | Flat |
| Operating income (loss) | $42 million | $(2) million | Improved by $44 million |
| Net income (loss) attributable to Dentsply Sirona | $18 million | $(19) million | Improved by $37 million |
| Diluted EPS | $0.09 | $(0.09) | Improved by $0.18 |
| Cash flow from operations | $25 million | $(21) million | Improved by $46 million |
SG&A was $415 million, down slightly from $416 million, while R&D declined to $42 million from $46 million. The company recorded a $6 million impairment of certain imaging-product trade names and $1 million of restructuring and other costs, compared with $59 million of restructuring and other costs in the prior-year quarter. Interest expense, net declined to $18 million from $20 million, and other income, net was $7 million compared with other expense of $6 million in Q1 2023.
The effective tax rate increased to 44.9% from 18.4%, primarily due to a higher valuation allowance and a shift in earnings toward jurisdictions with higher statutory tax rates. The company stated that the impact of the global Pillar Two minimum tax was not significant.
Revenue by segment and geography
| Segment | Q1 2024 sales | Organic sales change | Reported sales change |
|---|---|---|---|
| Connected Technology Solutions | $247 million | Down 5.7% | Down 6.9% |
| Essential Dental Solutions | $364 million | Down 5.5% | Down 5.9% |
| Orthodontic and Implant Solutions | $271 million | Up 5.6% | Up 4.4% |
| Wellspect Healthcare | $71 million | Up 4.8% | Up 5.4% |
U.S. sales increased 1.5% to $356 million, while Europe declined 5.2% to $376 million and Rest of World declined 4.4% to $221 million. Germany represented approximately 10% of consolidated sales and remained affected by recessionary and high-inflation conditions.
Segment adjusted operating income declined in Connected Technology Solutions to $2 million from $6 million, Essential Dental Solutions to $115 million from $125 million, and Orthodontic and Implant Solutions to $42 million from $49 million. Wellspect Healthcare increased to $23 million from $18 million.
Liquidity, cash flow, debt, and capital allocation
Cash and cash equivalents were $291 million at March 31, 2024, compared with $334 million at December 31, 2023. Operating cash flow was $25 million; capital expenditures were $34 million; and net cash used in investing activities was $43 million. The company expects full-year 2024 capital expenditures of approximately $170 million to $200 million, including spending for a new global ERP system, equipment upgrades, and capacity expansion.
Total debt was $2.090 billion on a carrying-value basis, including $343 million of current debt and $1.747 billion of long-term debt. Net debt was $1.799 billion, and net debt to total capitalization increased to 35.6% from 35.1% at year-end 2023. The company had $475 million of borrowing capacity available under its credit arrangements and was in compliance with all debt covenants. Commercial paper borrowings were $249 million, and the weighted-average short-term borrowing rate was 5.6%.
No shares were repurchased during the quarter. The company had $1.44 billion remaining under its share repurchase authorization and stated that it intended to repurchase up to $150 million of shares in the second quarter of 2024. A quarterly dividend of $0.16 per share was declared.
Material changes versus the prior comparable period
- Sales declined 2.6%, reflecting weaker demand in Essential Dental Solutions and Connected Technology Solutions, especially in Europe, partly offset by growth in orthodontics, implants, and Wellspect Healthcare.
- Operating results returned to profitability, aided by the absence of the prior-year $59 million restructuring charge, lower R&D and professional-service costs, lower warranty costs, and favorable foreign-exchange effects.
- Gross margin remained unchanged at 53.1%, as pricing and lower promotions offset higher manufacturing and input costs.
- Operating cash flow improved by $46 million, primarily from improved collections and a lower inventory build.
- The company recorded a $6 million impairment charge for imaging-product trade names after lower volumes, competitive pricing pressure, and weaker market conditions reduced forecasted revenue.
- Accumulated other comprehensive loss increased to $666 million from $636 million, primarily because of a $62 million after-tax foreign-currency translation loss, partially offset by a $32 million derivative gain.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear full-year revenue or earnings guidance figure. Management expects continued inflationary pressure on raw materials and wages during 2024, with the ability to offset these pressures dependent on pricing, procurement, cost containment, and productivity initiatives. The company expects challenging conditions in Germany to persist through at least the first half of 2024 and expects China’s implant volume growth to moderate for the remainder of the year.
The restructuring plan is expected to be substantially completed in 2024 and targets approximately 8% to 10% workforce reduction and approximately $200 million of annual cost savings, although savings will be partly offset by investments in sales personnel, the ERP system, and other transformation initiatives. Cumulative restructuring charges were $67 million and other non-recurring restructuring costs were $20 million through March 31, 2024. Total one-time charges are estimated at $115 million to $135 million.
Operations in Israel remained open, but the company identified risks of production interruptions, supply-chain disruption, higher costs, and potential impairment. Israeli manufacturing represented approximately 4% of consolidated sales and 13% of Orthodontic and Implant Solutions sales. Russia and Ukraine represented approximately 1% of consolidated sales; $44 million of cash in Russia may be difficult or costly to repatriate.
The company continues to incur costs related to its internal investigation, SEC cooperation, and related litigation, including $2 million in the first quarter and an expectation of additional costs during the remainder of 2024. Several securities and derivative lawsuits remain pending, and the company cannot estimate any potential loss. An IRS examination proposes approximately $2 million of additional federal income tax, excluding interest, but no liability has been accrued because management believes its tax positions are more likely than not to be sustained.
Future impairment risk remains elevated for certain intangible assets and reporting units. The fair value of the Implants & Prosthetics reporting unit exceeded carrying value by less than 15% at March 31, 2024; a hypothetical 100-basis-point increase in discount rates would reduce the excess to less than 10%.
Important facts for investors to verify
- Whether weakness in imaging, equipment, and Essential Dental Solutions persists beyond the seasonally weaker first quarter.
- Progress toward the restructuring plan’s expected $200 million annual cost savings and the remaining $115 million to $135 million of estimated one-time charges.
- Execution of the ERP implementation and the projected $170 million to $200 million of 2024 capital expenditures.
- Future impairment testing outcomes for imaging trade names and the Implants & Prosthetics reporting unit.
- Cash generation, commercial paper reliance, debt covenant headroom, and the planned second-quarter share repurchases.
- Developments in the SEC matter, securities litigation, derivative lawsuits, and the Italian arbitration claim seeking €28 million.
- Potential operational and asset risks from the Israel-Gaza conflict, the Russia-Ukraine conflict, inflation, interest rates, foreign exchange, and regulatory changes affecting direct-to-consumer aligners.