DENTSPLY SIRONA Inc. — FY2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter items are identified where disclosed. Dentsply Sirona is a global dental products and technologies manufacturer operating through Technologies & Equipment and Consumables segments in more than 150 countries.
Business Context
- Technologies & Equipment represented 59.1% of 2022 sales; Consumables represented 40.9%.
- Approximately two-thirds of sales are outside the United States, increasing exposure to foreign exchange, geopolitical, regulatory and macroeconomic conditions.
- Key 2022 product and platform initiatives included DS Core, Primeprint, Primescan Connect, Axano, the EV Implants System and expanded SureSmile offerings.
Key Financial Metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $3.922 billion | $4.231 billion | Down 7.3% |
| Organic sales | — | — | Down 0.5% |
| Gross profit | $2.127 billion | $2.347 billion | Down 9.4% |
| Gross margin | 54.2% | 55.5% | Down 130 bps |
| Operating income (loss) | $(937) million | $608 million | Declined materially |
| Net income (loss) | $(950) million | $411 million | Declined $1.361 billion |
| Diluted EPS | $(4.41) | $1.87 | Declined |
| Cash flow from operations | $517 million | $657 million | Down $140 million |
| Capital expenditures | $149 million | $142 million | Up $7 million |
Revenue and Segment Performance
- Technologies & Equipment: Revenue was $2.318 billion, down 7.4% reported but up 0.4% organically. Segment adjusted operating income declined to $399 million from $543 million.
- Consumables: Revenue was $1.604 billion, down 7.1% reported and 1.7% organically. Segment adjusted operating income declined to $495 million from $539 million.
- Reported revenue was reduced by a 6.8% foreign-exchange impact. U.S. organic sales declined 4.6%, Europe increased 3.0%, and Rest-of-World organic sales declined 0.1%.
- China sales declined $93 million, primarily due to COVID-19 restrictions and lower patient traffic. Dealer CAD/CAM inventories declined approximately $60 million during 2022 after increasing approximately $50 million in 2021.
Profitability, Cash Flow, Debt and Liquidity
- The $950 million net loss was driven principally by a $1.187 billion non-cash goodwill impairment charge recorded in the third quarter, along with $100 million of indefinite-lived intangible asset impairments and other costs.
- SG&A increased to $1.589 billion, including approximately $61 million of internal investigation, remediation, legal, accounting and related personnel costs. R&D was $174 million, or 4.4% of sales.
- Gross margin declined due to foreign exchange, inflation in materials and distribution costs, supply-chain inefficiencies and unfavorable product mix. Management expects elevated inventory costs to pressure cost of goods sold in 2023 as inventory is sold.
- Cash and cash equivalents were $365 million at year-end, including $71 million held in Russia and subject to transfer restrictions. Inventory increased to $627 million from $515 million, and inventory days increased to 137 from 110.
- Total debt was approximately $1.944 billion, including $118 million of current debt and $1.826 billion of long-term debt. Net debt was $1.579 billion, and net debt to total capitalization increased to 29.3% from 26.0%.
- The Company had approximately $632 million of remaining borrowing capacity under credit lines, including a $700 million revolving facility maturing in July 2024 and commercial paper arrangements. Debt covenants were satisfied at December 31, 2022.
- Financing activities used $329 million, including $150 million of share repurchases and $104 million of cash dividends. Remaining share-repurchase authorization was $740 million.
Material Changes Versus 2021
- Sales declined despite price increases and stronger European performance, reflecting foreign-exchange headwinds, lower U.S. demand, supply constraints, COVID-19 effects in China and reduced elective-procedure demand.
- Profitability deteriorated sharply because of goodwill and intangible impairments, higher operating costs, inflation, lower volumes and investigation-related expenses.
- Cash from operations declined 21%, while debt decreased by approximately $151 million and cash increased by $26 million.
- Goodwill declined to $2.688 billion from $3.976 billion following the impairment charge; remaining goodwill and certain intangible assets have limited valuation cushion and remain sensitive to assumptions.
- Management and finance leadership changed during 2022, including the appointment of a new CEO and CFO.
Guidance, Outlook, Risks and Unusual Items
- On February 14, 2023, the Board approved a restructuring plan expected to reduce the global workforce by approximately 8% to 10%, incur up to $165 million of one-time charges and produce $200 million to $225 million of annual net cost savings. The plan is expected to be substantially completed within 18 months.
- Capital expenditures for 2023 were estimated at approximately $150 million to $170 million. The filing does not provide a clear 2023 revenue or earnings guidance range.
- Major operating risks include inflation, rising interest rates, foreign exchange, supply-chain shortages, weaker elective dental demand, distributor inventory changes, COVID-19 developments, geopolitical disruption and China’s volume-based procurement program, which is expected to reduce implant pricing and margins.
- Management identified material weaknesses in internal control over financial reporting that remained unremediated at year-end. The weaknesses relate to the control environment, staffing and accounting for customer incentive arrangements and variable consideration. Disclosure controls were also deemed ineffective.
- The Company restated 2021 financial statements, including an approximately $20 million overstatement of 2021 net sales, and is cooperating with an ongoing SEC investigation. Securities class actions related to revenue recognition are pending; potential losses cannot currently be estimated.
- An IRS dispute concerns a $546 million worthless-stock deduction. The Company has not accrued a liability and believes its position is more likely than not to be sustained, but an adverse outcome could materially affect earnings, liquidity and financial position.
- The independent auditor issued an unqualified opinion on the financial statements but concluded that internal control over financial reporting was not effective because of the material weaknesses.
Investor Verification Checklist
- Verify progress and costs associated with remediation of the material weaknesses and the status of the SEC investigation and securities litigation.
- Assess whether the restructuring delivers the projected $200 million to $225 million of annual savings and whether one-time charges remain within the $165 million estimate.
- Monitor goodwill and intangible-asset valuation sensitivity, particularly the reporting units whose fair values approximate carrying value.
- Evaluate cash conversion, inventory reduction, supply-chain normalization and the expected 2023 impact of elevated inventory costs.
- Review debt maturities, covenant compliance and refinancing needs before the July 2024 maturity of the revolving credit facility.
- Track China’s procurement program, implant pricing, foreign exchange trends and demand for elective implants, aligners and equipment.