DENTSPLY International Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2011, filed April 28, 2011. DENTSPLY designed, manufactured and marketed professional dental consumable, laboratory and specialty products in more than 120 countries. Approximately 97% of sales were from professional dental products and more than 60% of sales were generated outside the United States.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $570.5 million | $545.9 million | 4.5% |
| Net sales excluding precious metal content | $527.0 million | $497.3 million | 6.0% |
| Gross profit | $300.0 million | $282.0 million | 6.4% |
| Gross margin, including precious metal content | 52.6% | 51.7% | +0.9 percentage points |
| Gross margin, excluding precious metal content | 56.9% | 56.7% | +0.2 percentage points |
| Operating income | $98.6 million | $89.3 million | 10.4% |
| Net income attributable to DENTSPLY | $69.1 million | $61.8 million | 11.7% |
| Diluted EPS | $0.48 | $0.41 | 17.1% |
| Cash flow from operations | $44.0 million | $36.5 million | 20.4% |
Constant-currency sales growth excluding precious metal content was 4.6%, comprising 3.8% internal growth and 0.8% acquisition growth. Adjusted non-GAAP diluted EPS was $0.49 versus $0.44 in the prior-year quarter; the filing reconciles this measure to GAAP EPS.
SG&A increased 6.8% to $200.8 million, primarily due to the biennial International Dental Show in Cologne and costs supporting new product launches. Restructuring and other costs declined to $0.6 million from $4.7 million. The effective tax rate was 25.2%, compared with 25.5%.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $575.3 million at March 31, 2011, compared with $540.0 million at December 31, 2010.
- Total debt, including current maturities, was approximately $663.7 million based on the balance sheet; long-term debt was $652.3 million and current debt was $11.5 million.
- Long-term debt to total capitalization increased to 24.8% from 24.1% at year-end 2010.
- Operating cash flow was $44.0 million. Investing cash outflows were $33.1 million, including $11.8 million of capital expenditures and $21.1 million for acquisitions and related activity.
- Financing cash outflows were $1.7 million, including $73.7 million of treasury-stock purchases and $7.1 million of dividends, partly offset by $51.1 million of long-term borrowings and $22.2 million from stock-option exercises.
- Management expected approximately $70.0 million of capital expenditures for full-year 2011.
- The company had $173.6 million outstanding under its multi-currency revolving facility, with aggregate unused capacity of $97.6 million under the revolving and uncommitted short-term facilities. It was in compliance with applicable debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth was strongest in the France/U.K./Italy/other Europe, CIS, Middle East, Africa and Pacific Rim group, where sales excluding precious metal content increased 12.1%.
- Canada/Latin America/Endodontics/Orthodontics sales increased 6.5%, while Dental Laboratory/Implants/Non-Dental sales increased only 0.9%.
- Segment operating income increased in three of four principal operating groups; the France/U.K./Italy/other Europe, CIS, Middle East, Africa and Pacific Rim group remained slightly unprofitable at negative $0.6 million.
- Receivables and inventories increased to $385.4 million and $332.3 million, respectively, from $344.8 million and $308.7 million at year-end. Management reported increases in receivable days and inventory days on a constant-currency basis.
- Treasury stock increased to 21.9 million shares from 21.0 million shares after the repurchase of approximately 2.0 million shares for $73.7 million.
- Foreign-currency translation generated a $90.7 million gain in other comprehensive income, versus a $77.2 million loss in Q1 2010. Derivative losses partially offset the 2011 currency gain.
- The company acquired a business and purchased the remaining shares of a consolidated variable-interest entity; total acquisition-related cash payments were $21.1 million.
Guidance, Outlook, Risks and Unusual Items
- Management’s long-term internal-growth target was 4% to 6%, but it expected growth below that range for the remainder of 2011, primarily because of the Japan disaster.
- The March 11, 2011 Japan earthquake and related disruptions had minimal first-quarter impact but were expected to reduce full-year diluted EPS by approximately $0.12 to $0.17, subject to supply, customer-acceptance and restructuring assumptions.
- A key Japanese supplier in the evacuation zone supplied orthodontic products representing approximately 9% of consolidated annual sales excluding precious metal content. DENTSPLY was pursuing alternative supply and restructuring actions, but warned of possible customer losses and lower margins.
- Management did not believe a goodwill or intangible-asset impairment had occurred as of the filing date, but stated that it would continue monitoring the situation.
- The company held a $49.7 million investment in DIO Corporation convertible bonds, valued at $75.2 million at March 31, 2011. A DIO-related mark-to-market loss reduced first-quarter earnings by approximately $0.8 million after tax.
- Pending litigation included Cavitron-related class-action matters and the Guidance Endodontics case, involving a jury verdict of approximately $4.0 million in compensatory damages and $40.0 million in punitive damages. The company was pursuing post-trial remedies; management stated that the ultimate range of losses could not be estimated except as disclosed and that an unfavorable resolution could materially affect operating results.
- The company had approximately $128.4 million of precious metals held on consignment. Loss of these arrangements could require third-party financing to fund inventory ownership.
- Other exposures included foreign exchange, variable interest rates, commodity prices, customer credit, tax matters and the potential for restructuring or acquisition-related costs.
Most Important Facts for Investors to Verify
- Whether alternative orthodontic supply arrangements sufficiently mitigate the Japan-related disruption and the projected $0.12–$0.17 diluted-EPS impact.
- Future customer retention, sales and margin performance in the Orthodontics segment.
- Progress and ultimate resolution of the Guidance Endodontics and Cavitron litigation matters.
- Changes in debt balances, interest rates, derivative valuations and available credit capacity.
- Working-capital trends, particularly the increase in receivables and inventories relative to sales.
- Valuation and credit risk associated with the DIO convertible-bond investment and related mark-to-market accounting.
- Whether acquisitions, share repurchases and planned capital expenditures remain consistent with operating cash generation.