DENTSPLY International Inc. — Q3 2010 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2010, compared with the same periods in 2009. DENTSPLY operated in more than 120 countries and primarily served the professional dental market, which represented approximately 97% of sales. Principal businesses included dental consumables, laboratory products, implants, endodontics, orthodontics and other specialty products.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Net sales | $541.8 million | $531.2 million | $1,652.8 million | $1,591.0 million |
| Net sales excluding precious metals | $494.3 million | $493.8 million | $1,510.5 million | $1,471.0 million |
| Gross profit | $272.8 million | $271.7 million | $842.4 million | $823.1 million |
| Operating income | $90.4 million | $92.9 million | $284.7 million | $277.8 million |
| Net income attributable to DENTSPLY | $63.7 million | $67.5 million | $197.9 million | $199.4 million |
| Diluted EPS | $0.44 | $0.45 | $1.35 | $1.33 |
| Operating cash flow | Not separately provided | Not separately provided | $248.9 million | $245.4 million |
Q3 net sales increased 2.0% on a reported basis, but sales excluding precious-metal content increased only 0.1%. Nine-month reported sales increased 3.9%, while sales excluding precious-metal content increased 2.7%. Gross margin excluding precious-metal content was 55.2% in Q3 versus 55.0% in the prior year and 55.8% for nine months versus 56.0%.
Q3 SG&A increased 2.5% to $182.1 million and represented 36.8% of sales excluding precious-metal content, compared with 36.0% in the prior year. The nine-month SG&A ratio improved slightly to 36.6% from 36.7%. The Q3 effective tax rate increased to 25.0% from 22.8%; the nine-month rate was 25.3% versus 24.8%.
At September 30, 2010, cash and cash equivalents were $534.2 million, compared with $450.3 million at December 31, 2009. Total current assets were $1.33 billion and current liabilities were $351.9 million. Long-term debt was $592.4 million, compared with $387.2 million at year-end 2009; current debt was $7.3 million versus $82.2 million. Long-term debt represented 24.1% of total capitalization, up from 19.2%.
Nine-month operating cash flow was $248.9 million. Investing cash outflows were $51.3 million, including $29.6 million of capital expenditures and $22.0 million for acquisitions. Financing cash outflows were $86.9 million, including $208.5 million of share repurchases and $23.1 million of dividends, partially offset by new long-term borrowings. The company expected full-year 2010 capital expenditures of $40 million to $50 million.
Material changes versus the prior comparable period
- Q3 net income attributable to DENTSPLY declined 5.6% and diluted EPS declined to $0.44 from $0.45, despite modest sales and gross-profit growth.
- Nine-month net income attributable to DENTSPLY declined 0.8%, while diluted EPS increased to $1.35 from $1.33, aided by a lower share count following substantial repurchases.
- Constant-currency sales excluding precious-metal content grew 2.4% in Q3 and 2.6% year to date; internal growth was 2.0% and 2.3%, respectively.
- The Canada/Latin America/Endodontics/Orthodontics segment was the strongest growth contributor, with Q3 sales excluding precious-metal content up 6.4% and operating income up 13.7%.
- Dental Laboratory/Implants/Non-Dental sales excluding precious-metal content declined 7.7% in Q3 and 2.8% year to date; operating income declined 22.6% and 8.6%, respectively, primarily because of weaker dental laboratory performance.
- The company issued $250.0 million of fixed-rate private placement notes, entered into a CHF65.0 million term loan, and replaced its prior $500.0 million revolving facility with a $200.0 million facility maturing in 2013.
- Restructuring and other costs declined to $0.3 million in Q3 from $1.2 million, and to $5.3 million for nine months from $5.9 million.
Guidance, outlook, risks and unusual items
- Management’s long-term internal growth target was 4% to 6%, but it expected growth to remain below that range in the near term because of economic conditions.
- Management cited cost controls, facility consolidation, process improvements, product innovation and acquisitions as key operating priorities. No specific earnings guidance was provided.
- Major risks included foreign-exchange volatility, economic and customer-liquidity conditions, competitive and regulatory pressures, technological change, commodity prices, interest rates and the ability to commercialize new products.
- More than 60% of sales were generated outside the United States, creating significant currency exposure. The company used foreign-currency debt, swaps, forward contracts and commodity hedges to manage this exposure.
- Pending litigation included Cavitron-related class-action matters and a Guidance Endodontics case involving an approximately $4.0 million compensatory verdict and $40.0 million punitive verdict. The company was pursuing post-trial remedies; management stated that a reasonable loss range could not otherwise be estimated and that unfavorable resolutions could materially affect operating results.
- The company held $108.3 million of precious metals on consignment. Loss of these arrangements could require third-party financing to fund inventory ownership.
- Potential changes in unrecognized tax benefits over the following 12 months included approximately $1.0 million from settlements and $1.2 million from statute expirations.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported sales growth with the much lower growth excluding precious-metal content, a non-GAAP measure.
- Assess whether the dental laboratory weakness is temporary or reflects a longer-term mix and demand issue.
- Monitor leverage, debt maturities, revolving-facility availability and compliance with debt covenants.
- Review the status and potential financial exposure of the Guidance Endodontics and Cavitron litigation.
- Evaluate the sustainability of earnings growth after substantial share repurchases and the impact of higher interest expense and tax rates.
- Confirm the company’s ability to achieve its stated $40 million to $50 million 2010 capital-expenditure plan and finance acquisitions, repurchases and debt service from operating cash flow.