DENTSPLY International Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. DENTSPLY manufactured and distributed dental consumables, laboratory and specialty products, and consumable medical devices in more than 120 countries. Professional dental products represented approximately 88% of sales.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $698.0 million | $765.2 million | $1,354.3 million | $1,495.3 million |
| Sales excluding precious metals | $674.7 million | $730.9 million | $1,306.2 million | $1,420.1 million |
| Gross profit | $399.7 million | $424.5 million | $773.0 million | $818.7 million |
| Gross margin excluding precious metals | 59.2% | 58.1% | 59.2% | 57.6% |
| Operating income | $85.8 million | $127.1 million | $183.5 million | $232.7 million |
| Net income attributable to DENTSPLY | $44.1 million | $90.0 million | $108.1 million | $162.9 million |
| Diluted EPS | $0.31 | $0.62 | $0.76 | $1.13 |
| Adjusted diluted EPS | $0.73 | $0.69 | $1.31 | $1.28 |
Q2 GAAP operating margin was 12.7%, compared with 17.4% in the prior-year quarter. Adjusted operating margin increased to 21.1% from 19.3%. The six-month GAAP operating margin was 14.0%, while adjusted operating margin was 19.9%, compared with 18.5% in 2014.
- Operating cash flow was $211.2 million for the six months, versus $220.2 million in 2014.
- Capital expenditures were approximately $34.1 million year to date; full-year 2015 capital expenditures were expected to be approximately $90 million to $100 million.
- Cash and cash equivalents declined to $96.5 million at June 30, 2015, from $151.6 million at December 31, 2014.
- Total debt was approximately $1.20 billion, including $119.7 million of current debt and $1.08 billion of long-term debt. Net debt to total capitalization was 32.2%, versus 32.3% at year-end 2014.
- The company had approximately $526 million of unused borrowing capacity and was compliant with debt covenants.
- Year-to-date financing uses included $99.0 million for treasury stock, $19.6 million for dividends, $80.5 million to acquire noncontrolling interests, and $100.2 million of long-term debt repayments.
Material changes versus the prior comparable period
- Reported sales declined 8.8% in Q2 and 9.4% year to date, primarily because of unfavorable foreign currency translation and lower precious-metal content. Excluding precious metals, sales declined 7.7% in Q2 and 8.0% year to date; constant-currency sales grew 3.2% and 2.2%, respectively.
- Internal sales growth in Q2 was 3.6% worldwide, including 3.3% in the United States, 1.9% in Europe, and 7.9% in the rest of the world.
- Restructuring and other costs increased to $38.9 million in Q2 and $44.3 million year to date, compared with $1.2 million and $2.0 million, respectively, in 2014. The charges primarily related to laboratory-business and manufacturing realignment and global efficiency initiatives.
- The company’s 17% investment in DIO Corporation generated an equity loss of $8.2 million in Q2 and $12.5 million year to date, largely because of mark-to-market losses on DIO-related convertible bonds.
- The effective tax rate increased to 32.2% in Q2 and 26.6% year to date, from 22.4% and 22.9%, respectively. The increase included prior-year tax matters and a less favorable mix of earnings.
- Goodwill declined to $2.00 billion from $2.09 billion at year-end, primarily because of foreign exchange translation. Annual goodwill and indefinite-lived intangible impairment tests identified no impairment.
- The company adopted debt-issuance-cost presentation guidance retrospectively in Q2, reducing reported debt and other noncurrent assets; the change did not affect earnings or cash flow.
Guidance, outlook, commentary, and risks
- Management expects additional 2015 restructuring costs of approximately $25 million to $30 million, primarily severance, and estimates annual savings of $25 million to $32 million over three to five years. There is no assurance the savings or the company’s long-term adjusted operating-margin target of 20% will be achieved.
- Management expects the global dental market to grow approximately 3% to 6% over time and targets growth slightly above the market, although near-term growth remains uncertain.
- More than 60% of sales were outside the United States. The stronger U.S. dollar, particularly against the euro, was expected to materially pressure reported sales and earnings in 2015.
- Key exposures include foreign exchange, interest rates, commodity prices, regulatory compliance, product liability, litigation, acquisitions, and execution of restructuring programs.
- Pending matters include product-related class actions, a False Claims Act qui tam action, and government inquiries regarding export controls and economic sanctions. Management did not believe a loss was probable for the disclosed litigation and could not estimate a reasonable loss range; unfavorable outcomes could materially affect results.
- The company had $75 million of Private Placement Notes due in February 2016 and an $8.8 million term-loan installment due in August 2015. The revolving credit facility was amended effective July 1, 2015 to extend its maturity.
- At June 30, 2015, the company held $58.5 million of precious metals on consignment. Loss of these arrangements could require additional financing for inventory.
Important facts for investors to verify
- Whether constant-currency growth can offset continuing foreign-exchange pressure and declining precious-metal sales.
- The timing, total cost, and realized savings from the laboratory reorganization and global efficiency initiatives.
- The sustainability of the reported adjusted margins and adjusted EPS relative to GAAP results.
- The effect of DIO’s valuation changes and the $153.6 million fair value of DIO convertible bonds on future earnings and accumulated other comprehensive income.
- Debt refinancing and liquidity needs through February 2016, including commercial-paper usage and covenant compliance.
- Developments in the litigation and export-control or sanctions inquiries, for which the ultimate exposure was not estimable.