DENTSPLY SIRONA Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global dental products and technology manufacturer, with dental equipment, CAD/CAM, imaging, implants, orthodontics, instruments, consumables, and healthcare products. The filing covers the unaudited quarter ended March 31, 2023, compared with the quarter ended March 31, 2022. Reportable segments were Technologies & Equipment and Consumables; the company announced a four-segment structure effective in the second quarter of 2023.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $978 million | $969 million | +0.9% |
| Organic sales growth | 5.1% | Not clearly provided | Foreign exchange impact: -4.2% |
| Gross profit | $519 million | $521 million | -$2 million |
| Gross margin | 53.1% | 53.8% | -70 bps |
| Operating income (loss) | $(2) million | $97 million | -$99 million |
| Net income (loss) attributable to Dentsply Sirona | $(19) million | $69 million | -$88 million |
| Diluted EPS | $(0.09) | $0.32 | -$0.41 |
| Cash flow from operating activities | $(21) million | $93 million | -$114 million |
- Consumables revenue increased 6.4% to $430 million, while Technologies & Equipment revenue declined 3.0% to $548 million.
- U.S. revenue increased 13.9% to $351 million; Europe declined 3.6% to $396 million; Rest of World declined 7.6% to $231 million.
- Segment adjusted operating income declined to $198 million from $221 million, with Technologies & Equipment down to $67 million and Consumables down to $131 million.
- SG&A increased 10.7% to $416 million, and restructuring and other costs increased to $59 million from $3 million. R&D was $46 million, or 4.7% of sales.
- Cash and equivalents were $318 million at March 31, 2023, versus $365 million at year-end 2022. Net debt increased to $1.84 billion, and net debt-to-total-capitalization increased to 33.6% from 29.3%.
- Total debt carrying value was $2.158 billion, including $316 million of current debt and $1.842 billion of long-term debt. The company had $433 million of borrowing capacity and was in compliance with debt covenants.
- Capital expenditures were $39 million in the quarter. Full-year 2023 capital expenditures are estimated at approximately $150 million to $170 million.
Material changes versus the prior comparable period
- Reported sales grew modestly, but organic growth of 5.1% was more than offset by foreign exchange headwinds. Consumables, Orthodontics, pricing, and U.S. demand were favorable; Implants, certain equipment products, China, and other Rest of World markets were weaker.
- Gross margin contracted because of foreign exchange, inflation, raw-material and distribution costs, and supply-chain disruptions. Pricing, product mix, and improved Orthodontics profitability partially offset these pressures.
- Operating results deteriorated primarily because of higher SG&A, restructuring costs, inflationary costs, and higher interest expense. Interest expense increased to $19 million from $12 million.
- Operating cash flow turned negative, reflecting working-capital use, lower collections, increased expenses, and higher inventories. Inventory increased to $659 million from $627 million at December 31, 2022.
- The company repurchased approximately 3.1 million shares for $120 million during the quarter under a $150 million accelerated share repurchase agreement. The agreement was finally settled in April 2023, bringing total shares received to approximately 3.9 million.
Guidance, outlook, risks, contingencies, and unusual items
- The company did not provide clear consolidated revenue or earnings guidance in the filing. It expects its restructuring plan to be substantially completed by mid-2024 and to produce $200 million to $225 million of annual cost savings.
- The restructuring plan anticipates an 8% to 10% global workforce reduction and total one-time charges of $115 million to $135 million, mostly incurred in 2023. Management states that actual costs and timing may differ materially.
- Supply-chain constraints, component shortages, higher material, labor, logistics and procurement costs, inflation, interest rates, recessionary pressures, and weaker elective-procedure demand remain significant risks.
- COVID-19 effects continued to affect China and patient traffic, although restrictions were substantially lifted by quarter-end. Russia and Ukraine represented approximately 3% of quarterly sales, and $57 million of cash was held in Russia subject to repatriation restrictions.
- Goodwill and indefinite-lived intangible assets remained sensitive to discount rates, forecasts, foreign exchange, cost inflation, and demand. The filing states that further adverse changes could result in additional impairment charges.
- Material weaknesses in internal control over financial reporting remained unremediated. The weaknesses relate to tone at the top, personnel resources, customer incentive arrangements, and the completeness and accuracy of revenue and variable consideration. Disclosure controls were therefore concluded to be ineffective.
- The company continues to face securities litigation, including a federal class action whose motion to dismiss was denied on March 29, 2023, and additional securities litigation related to distributor incentive and revenue-recognition disclosures. The company cannot currently estimate potential losses for these matters.
- An Italian arbitration claim seeks €28 million related to a 2012 acquisition, including €7 million of alleged unpaid purchase price and €21 million of alleged damages. The company denies liability.
- The IRS allowed the company’s $546 million worthless-stock deduction for tax year 2013, and the company anticipates a $5 million refund for 2012. Separately, the IRS proposed an adjustment related to a 2016 internal reorganization that could create additional federal tax exposure if sustained; the company intends to contest it.
- The company expects to fund operations, capital expenditures, and debt service through cash, operating cash flow, and available borrowing capacity, but it also stated that remediation, restructuring, litigation, and related professional costs will continue.
Most important facts for investors to verify
- Progress, cash costs, timing, and realized savings from the restructuring plan.
- Remediation and independent testing of the three disclosed material weaknesses in internal control over financial reporting.
- Working-capital trends, particularly receivables, inventory, operating cash flow, and reliance on commercial paper.
- Debt maturities, borrowing costs, covenant headroom, and the sustainability of liquidity with net debt at $1.84 billion.
- Whether gross-margin pressure from inflation, foreign exchange, supply constraints, and pricing can be reversed.
- Potential additional goodwill or intangible-asset impairments under weaker forecasts or higher discount rates.
- Developments in the pending securities litigation, Italian arbitration, and IRS tax dispute, including any estimated loss exposure.
- Quarterly comparability after the transition to four reportable segments beginning in Q2 2023.