DENTSPLY International Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. DENTSPLY operated in more than 120 countries and generated approximately 97% of sales from professional dental products, including consumables, laboratory products, implants, endodontics and orthodontics.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net sales | $565.1 million | $552.8 million | $1,111.0 million | $1,059.8 million |
| Sales excluding precious metals | $519.3 million | $511.5 million | $1,016.8 million | $977.2 million |
| Gross profit | $287.6 million | $285.7 million | $569.6 million | $551.4 million |
| Gross margin excluding precious metals | 55.4% | 55.8% | 56.0% | 56.4% |
| Operating income | $105.0 million | $98.7 million | $194.3 million | $184.9 million |
| Net income attributable to DENTSPLY | $72.4 million | $70.2 million | $134.2 million | $131.9 million |
| Diluted EPS | $0.49 | $0.47 | $0.91 | $0.88 |
| Cash flow from operations | Not provided for the quarter | Not provided for the quarter | $150.5 million | $115.4 million |
Q2 sales excluding precious-metal content increased 1.5%, reflecting 2.8% constant-currency growth, including 2.5% internal growth, partly offset by a 1.3% currency translation impact. Six-month sales excluding precious-metal content increased 4.1%.
Q2 operating margin was approximately 18.6%, compared with 17.9% in the prior-year quarter. The improvement reflected lower SG&A and restructuring costs, partially offset by a lower gross margin. SG&A was 35.1% of sales excluding precious metals versus 35.9% in Q2 2009. The effective tax rate was 25.5% for both the quarter and six-month period, compared with 25.7% and 25.9%, respectively, in 2009.
At June 30, 2010, cash and cash equivalents were $340.3 million, compared with $450.3 million at December 31, 2009. Total debt was approximately $474.9 million, consisting primarily of $463.0 million of long-term debt and $11.9 million of current debt. The company reported a long-term-debt-to-total-capitalization ratio of 21.1%, versus 19.2% at year-end 2009.
Material changes versus the prior comparable period
- Q2 net sales increased 2.2% on a reported basis; sales excluding precious metals increased 1.5%.
- Q2 net income attributable to DENTSPLY rose 3.1%, and diluted EPS increased from $0.47 to $0.49. Six-month net income increased 1.7%, while diluted EPS increased from $0.88 to $0.91.
- Canada/Latin America/Endodontics/Orthodontics was the strongest Q2 segment, with sales excluding precious metals up 8.6% and segment operating income up 7.9%.
- U.S., Germany and other European consumables segment operating income increased 16.1% in Q2, despite sales excluding precious metals declining 1.7% on a reported basis.
- Dental Laboratory/Implants/Non-Dental sales excluding precious metals declined 5.7% in Q2 and 0.5% for the six months, primarily because of weaker dental laboratory sales.
- Restructuring and other costs declined to $0.2 million in Q2 from $3.1 million, but six-month costs were $4.9 million versus $4.7 million. Six-month 2010 other costs primarily related to asset impairments and legal matters.
- Cash flow from operations increased $35.1 million year over year, primarily because of improved working capital.
- The company repurchased 5.1 million shares for $176.6 million during the first six months, leaving 19.6 million treasury shares at June 30, 2010.
- The company issued $250.0 million of fixed-rate senior notes at 4.11%, entered into a Swiss-franc term loan, and replaced its prior $500.0 million revolving facility with a $200.0 million facility maturing in 2013.
Guidance, outlook, risks and unusual items
- Management considers 4% to 6% internal growth a sustainable long-term range but expected performance below that range in the near term because of economic conditions. No specific earnings guidance was provided.
- Management expected 2010 capital expenditures of $50 million to $60 million; $18.9 million had been spent through June 30.
- More than 60% of sales were generated outside the United States, creating significant foreign-exchange exposure. Six-month foreign-currency translation losses were $215.0 million in other comprehensive income, reducing accumulated other comprehensive income to a $55.7 million loss.
- Derivative instruments created material volatility. Q2 included approximately $8.6 million of losses from derivatives not designated as hedges, and the company recorded a $0.7 million credit-risk adjustment to outstanding derivatives in its adjusted earnings reconciliation.
- Pending litigation included Cavitron-related class actions and a Guidance Endodontics matter involving a jury verdict of approximately $4.0 million in compensatory damages and $40.0 million in punitive damages. Management was pursuing post-trial remedies and did not believe the matter would materially affect financial position, although an unfavorable resolution could materially affect operating results.
- Potential changes in unrecognized tax benefits of approximately $1.0 million could arise from settlements and another approximately $1.0 million from expiring statutes of limitation during the following twelve months.
- The company stated that it remained in compliance with debt covenants and expected to fund operating needs, capital expenditures, debt service, repurchases and potential acquisitions through operating cash flow and available credit facilities.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing stated that there were no significant changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether internal growth can return to management’s 4%–6% long-term target amid economic weakness and lower dental laboratory demand.
- The sustainability of margins as unfavorable product mix, currency movements, pricing and manufacturing efficiencies change.
- Foreign-exchange exposure, derivative valuations and the substantial decline in accumulated other comprehensive income.
- Cash deployment from the $176.6 million share repurchase program relative to reduced cash balances and increased leverage.
- Final outcomes and potential cash exposure from the Guidance Endodontics verdict and pending Cavitron-related litigation.
- Availability and covenant capacity under the $200.0 million revolving facility, commercial paper program and other short-term credit lines.
- The distinction between GAAP results and management’s adjusted earnings, which exclude restructuring, acquisition-related charges, derivative credit-risk adjustments and tax adjustments.