DENTSPLY SIRONA Inc. — Q1 2022 Form 10-Q Summary
Reporting period: Three months ended March 31, 2022; unaudited consolidated results. The filing was submitted November 7, 2022 after a delay related to the Audit and Finance Committee’s internal investigation. The company operates through Technologies & Equipment and Consumables segments and sells dental equipment, technology, consumables, implants, orthodontic products, CAD/CAM systems, and healthcare products.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $969 million | $1,026 million | Down 5.5% |
| Gross profit | $521 million | $579 million | Down 10.0% |
| Gross margin | 53.8% | 56.4% | Down 260 bps |
| Operating income | $97 million | $150 million | Down 35.3% |
| Operating margin | 10.0% | 14.6% | Down approximately 460 bps |
| Net income attributable to Dentsply Sirona | $69 million | $112 million | Down 38.4% |
| Diluted EPS | $0.32 | $0.51 | Down $0.19 |
| Operating cash flow | $93 million | $49 million | Up $44 million |
- Sales mix: Technologies & Equipment sales were $565 million, down from $595 million; Consumables sales were $404 million, down from $431 million.
- Geography: U.S. sales declined to $308 million from $347 million; Europe sales were $411 million versus $417 million; Rest of World sales were $250 million versus $262 million.
- Organic sales: Consolidated organic sales declined 0.8%; Technologies & Equipment was approximately flat and Consumables declined 1.8%. Europe and Rest of World organic sales increased 6.2% and 1.6%, respectively, while U.S. organic sales declined 11.0%.
- Cash and liquidity: Cash and cash equivalents were $374 million at March 31, 2022, compared with $339 million at December 31, 2021. The company reported $399 million of remaining borrowing availability and stated that it expects sufficient liquidity for the next twelve months.
- Debt: Current debt was $347 million and long-term debt was $1.872 billion. Net debt was $1.845 billion, and net debt to total capitalization increased to 27.5% from 26.0% at year-end 2021. The company was in compliance with debt covenants.
- Investing and financing: Capital expenditures were $44 million. Financing cash use included a $150 million accelerated share repurchase, partly offset by $163 million of short-term borrowings. The company estimated full-year 2022 capital expenditures of approximately $160 million to $180 million.
- Share repurchases and dividends: The company initially received 2.4 million shares under the $150 million ASR at an average price of $50.44. A further 0.7 million shares were delivered in April 2022. The quarterly dividend was $0.125 per share.
Material changes versus the prior comparable period
- Revenue declined primarily because of weaker U.S. performance, supply-chain constraints, lower demand associated with COVID-19 variants, and high dealer inventory for certain CAD/CAM products.
- Gross margin contracted because of foreign-currency headwinds, higher raw-material, labor, distribution, and shipping costs, global inflation, and lower sales of higher-margin products. Foreign currency reduced gross profit by approximately $32 million.
- Segment adjusted operating income declined to $86 million from $124 million in Technologies & Equipment and to $135 million from $149 million in Consumables.
- Research and development expense increased to $45 million from $40 million as the company continued investments in digital workflows, software, clinical applications, and cloud deployment. Management expects annual R&D investment to remain at least 4% of sales.
- Operating cash flow improved despite lower earnings, primarily because of working-capital timing and a smaller inventory build. Inventory increased to $553 million from $515 million at year-end.
- The company revised previously reported Q1 2021 figures for customer incentive programs, sales returns, warranty reserves, variable consideration, and other items. The revision reduced Q1 2021 sales by $1 million, operating income by $4 million, and diluted EPS by $0.02; previously reported cash flows were unchanged.
Guidance, outlook, risks, contingencies, and unusual items
- Guidance: The filing does not provide consolidated revenue or earnings guidance. It provides capital expenditure expectations of approximately $160 million to $180 million for 2022 and indicates that R&D spending is expected to remain at least 4% of annual sales.
- Investigation and controls: The internal investigation was completed in October 2022. The company reported no evidence of intentional wrongdoing or fraud in North America but identified code-of-conduct violations and an inappropriate control environment involving former senior management. The China investigation identified intentional wrongdoing and lack of truthful cooperation by certain commercial personnel and regional management.
- Material weaknesses: Material weaknesses in internal control over financial reporting remained unremediated as of March 31, 2022 and the filing date. They relate to tone at the top, insufficient accounting expertise regarding variable consideration, and ineffective controls over customer incentive arrangements and revenue recognition. Disclosure controls were therefore ineffective.
- COVID-19 and supply chain: The company reported component shortages, longer lead times, higher raw-material and transportation costs, labor shortages, elevated imaging-equipment backlog, and reduced patient traffic in certain markets. China restrictions during the quarter adversely affected demand and distribution.
- Russia and Ukraine: Sales in Russia and Ukraine represented approximately 3% of consolidated sales and net assets were $44 million. No material impairment, inventory reserve, or doubtful-account allowance was recorded for the conflict during the quarter, but an escalation could affect sales, sourcing, inflation, and logistics.
- Legal and tax matters: Securities litigation remains pending, including lawsuits alleging misleading disclosures concerning distributor rebate and incentive programs. The company cannot estimate potential losses. An IRS dispute could result in a material adverse outcome if the company’s position on a $546 million worthless-stock deduction is rejected. A Swedish tax matter could result in up to $11 million of additional tax expense based on the company’s current disclosure.
- Other unusual items: Restructuring expense was $3 million. Foreign-currency translation losses reduced other comprehensive income by $48 million. The company will change the functional currency of its Turkish subsidiaries to the U.S. dollar effective April 1, 2022, which may create future foreign-exchange volatility.
Investor verification checklist
- Verify the company’s remediation progress and whether the material weaknesses and ineffective disclosure controls have been resolved in subsequent filings.
- Assess the effect of customer incentive, rebate, returns, and variable-consideration accounting on reported revenue and prior-period restatements.
- Monitor U.S. demand, CAD/CAM dealer inventory normalization, backlog conversion, and the sustainability of price increases.
- Track gross-margin recovery against raw-material, labor, freight, inflation, and foreign-exchange pressures.
- Review short-term borrowing levels, commercial-paper reliance, debt maturities, covenant compliance, and liquidity following the delayed filings.
- Follow the pending securities litigation, IRS dispute, Swedish tax matter, and any related indemnification or legal-cost exposure.
- Confirm subsequent-period effects from the Russia-Ukraine conflict, China COVID-19 restrictions, and the Turkish functional-currency change.