DENTSPLY SIRONA Inc. 2020 Q1 Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global dental products and technology company operating through Technologies & Equipment and Consumables. The filing covers the unaudited three months ended March 31, 2020, compared with the first quarter of 2019. Approximately 90% of first-quarter 2020 sales came from professional dental products.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $874.3 million | $946.2 million | Down 7.6% |
| Gross profit | $467.8 million | $499.7 million | Down 6.4% |
| Gross margin | 53.5% | 52.8% | Up 70 basis points |
| Operating income (loss) | $(124.8) million | $47.3 million | Declined $172.1 million |
| Net income (loss) | $(139.9) million | $39.2 million | Declined $179.1 million |
| Diluted earnings (loss) per share | $(0.63) | $0.17 | Declined $0.80 |
| Cash flow from operations | $(10.7) million | $29.3 million | Declined $40.0 million |
Segment sales were $520.3 million for Technologies & Equipment, essentially flat year over year, and $354.0 million for Consumables, down 16.8%. Segment adjusted operating income was $172.7 million, compared with $177.5 million in the prior-year period.
At March 31, 2020, cash and cash equivalents were $235.9 million, down from $404.9 million at December 31, 2019. Total debt, including current debt, was approximately $1.45 billion, consisting of $33.0 million of current debt and $1.42 billion of long-term debt. The company reported $31.2 million of commercial paper outstanding and $1.6 million under other short-term lines. Available borrowing under existing lines was reported at $703.2 million. Net debt to total capitalization increased to 20.0% from 16.8% at year-end 2019.
Inventory increased to $590.5 million from $561.7 million, while trade receivables declined to $709.1 million from $782.0 million. Management reported 73 days of sales outstanding and 127 days of inventory on a constant-currency basis, each 11 days higher than at December 31, 2019.
Material changes versus the prior comparable period
- COVID-19 restrictions and limits on elective dental procedures reduced demand, particularly in March. Organic sales declined 4.3% overall, including growth of 4.8% in Technologies & Equipment and a decline of 15.2% in Consumables.
- Technologies & Equipment operating income increased 54.7% to $111.1 million, supported by CAD/CAM sales and cost reductions. Consumables operating income declined 41.7% to $61.6 million because of lower volume and unfavorable manufacturing variances.
- The company recorded a $156.6 million goodwill impairment charge related to the Equipment & Instruments reporting unit and a $38.7 million impairment of indefinite-lived tradenames and trademarks.
- Restructuring and other costs increased to $42.5 million from $20.5 million, while SG&A declined 8.9% to $393.5 million.
- Foreign currency translation losses increased accumulated other comprehensive loss by $112.5 million during the quarter, primarily reflecting currency movements.
- The company repurchased $140.0 million of common stock under an accelerated share repurchase agreement and paid $22.1 million in dividends.
Guidance, outlook, commentary and risks
Management did not provide a specific full-year sales or earnings forecast. It expects COVID-19 to materially affect 2020 results and stated that it cannot estimate when sales will return to pre-pandemic levels or when facilities will resume normal capacity. The company expected restrictions to affect at least part of the second quarter and anticipated unfavorable gross-margin pressure from reduced manufacturing volumes.
Cost and liquidity measures included furloughs and reduced hours, a hiring freeze, travel restrictions, reduced marketing and discretionary spending, delayed capital expenditures, tax-payment deferrals where permitted, and salary reductions for many employees. During April, approximately 52% of the workforce was affected by furloughs or reduced hours. Critical 2020 capital expenditures were expected to be approximately $75 million to $100 million.
After quarter-end, the company entered into a $310.0 million 364-day revolving facility, drew the full $700.0 million available under its existing revolving facility, and entered into a €40.0 million 364-day facility. It also received $48.1 million in cash from terminating its net investment hedge portfolio. Management believed liquidity was sufficient for the next twelve months and expected covenant compliance, but warned that a prolonged recovery could require covenant waivers. The company stated that failure to obtain waivers could result in default and acceleration of debt.
Additional risks include further goodwill or intangible-asset impairments, customer credit and collection issues, supply-chain disruption, reduced access to capital, foreign-exchange volatility, and prolonged weakness in dental procedures. S&P affirmed the company’s BBB issuer rating but changed its outlook to negative.
Material contingencies include an SEC investigation concerning accounting and disclosures, securities class and derivative litigation, an IRS dispute involving a $546.0 million worthless-stock deduction and a potential $17.1 million 2014 tax deficiency excluding interest, and Swedish tax disputes involving approximately $41.0 million of potential additional tax expense. The filing states that outcomes cannot be predicted and that certain adverse outcomes could materially affect results, liquidity or financial condition.
Facts investors should verify
- Actual pace of recovery in elective dental procedures, customer demand and manufacturing capacity after March 31, 2020.
- Drawn debt balances, interest expense, covenant compliance and liquidity after the subsequent $700.0 million borrowing and new revolving facilities.
- Potential additional goodwill and intangible-asset impairments, particularly for the reporting unit with approximately $1.1 billion of goodwill that was close to book value under sensitivity analyses.
- Cash conversion, receivable collections and inventory normalization as reflected in operating cash flow and working-capital days.
- Status and financial exposure of the SEC inquiry, IRS and Swedish tax matters, and securities-related litigation.
- Whether the company resumes or changes share repurchases and dividends while pandemic-related liquidity risks remain elevated.