Business Context and Reporting Period
DENTSPLY SIRONA Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company is a global dental-products and technology manufacturer operating through Technologies & Equipment and Consumables segments. Approximately 91% of sales came from professional dental products.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Net sales | $1,009.4 million | $1,042.1 million | (3.1%) |
| Gross profit | $540.8 million | $552.8 million | (2.2%) |
| Gross margin | 53.6% | 53.0% | +60 basis points excluding precious metals |
| Operating income (loss) | $67.5 million | $(1,154.1) million | Improved |
| Net income (loss) attributable to Dentsply Sirona | $36.4 million | $(1,122.0) million | Improved |
| Diluted EPS | $0.16 | $(4.98) | Improved |
| Adjusted diluted EPS | $0.66 | $0.60 | +$0.06 |
| Adjusted operating income and margin | $201.8 million; 20.2% | $180.3 million; 17.4% | Improved |
| Metric | Six Months 2019 | Six Months 2018 | Change |
|---|---|---|---|
| Net sales | $1,955.6 million | $1,998.2 million | (2.1%) |
| Net sales excluding precious-metal content | $1,935.5 million | $1,978.5 million | (2.2%) |
| Net income (loss) attributable to Dentsply Sirona | $75.6 million | $(1,040.8) million | Improved |
| Diluted EPS | $0.34 | $(4.60) | Improved |
| Adjusted diluted EPS | $1.14 | $1.05 | +$0.09 |
| Adjusted operating income and margin | $347.3 million; 17.9% | $317.8 million; 16.0% | Improved |
Six-month cash flow from operations was $174.4 million versus $172.0 million in the prior-year period. Capital expenditures were $63.5 million, and full-year 2019 capital expenditures were expected to be approximately $165 million to $175 million.
Cash and cash equivalents were $250.1 million at June 30, 2019, down from $309.6 million at December 31, 2018. Total debt, including current maturities, was approximately $1.50 billion; net debt to total capitalization was 19.4%, compared with 20.8% at year-end 2018. The company had $676.8 million of available borrowing capacity, no borrowings under its $700 million revolving credit facility, and $43.3 million outstanding under commercial paper. Debt covenants were in compliance.
Material Changes Versus the Prior Comparable Period
- Reported Q2 sales declined 3.1%, but constant-currency sales increased 1.1% and internal sales growth was 3.0%, excluding precious-metal content.
- Technologies & Equipment sales excluding precious-metal content increased 0.9% and segment adjusted operating income rose 39.5% to $96.0 million.
- Consumables sales excluding precious-metal content decreased 7.8% and segment adjusted operating income fell 15.1% to $121.8 million.
- The prior-year period included a $1,085.8 million goodwill impairment and a $179.2 million indefinite-lived intangible impairment. No goodwill impairment was recorded in 2019; a $5.3 million tradename and trademark impairment was recorded in the first quarter.
- Q2 2019 restructuring and other costs were $42.4 million versus $188.9 million in Q2 2018. Q2 2019 included approximately $32.8 million of fixed-asset impairments and $10.7 million of restructuring costs.
- SG&A as a percentage of sales excluding precious-metal content increased to 43.1% from 41.9%, primarily due to higher performance-based compensation and $11.0 million of severance costs related to the former CFO and Chief Human Resources Officer.
- The company prepaid the $131.3 million PNC Term Loan in May 2019 and entered into a private-placement agreement for a 12.5 billion Japanese yen, 12-year borrowing expected to fund in September 2019.
- The company adopted the new lease standard on January 1, 2019, recognizing operating lease right-of-use assets of $155.8 million and operating lease liabilities of $119.3 million at June 30, 2019.
Guidance, Outlook, Commentary, and Risks
Management’s transformation plan targets annualized topline growth of 3% to 4%, an adjusted operating margin of 20% by the end of 2020 and 22% by 2022, and $200 million to $225 million of annual net cost savings by 2021. The plan includes an expected 6% to 8% global workforce reduction and approximately $275 million of one-time expenditures and charges. Approximately $135 million of related expenses and charges, including approximately $70 million of non-cash charges, had been recorded through June 30, 2019. Management stated that achievement of these targets is not assured.
Headcount had declined by approximately 1,000 from the November 2018 baseline by June 30, 2019. Management attributed improved gross margins and Technologies & Equipment performance to cost savings, new products, favorable currency effects and divestitures, while Consumables remained pressured by lower sales and higher compensation.
- Foreign currency remains material: approximately two-thirds of sales are outside the United States, and the stronger U.S. dollar reduced Q2 sales excluding precious-metal content by approximately 4.4%.
- Distributor inventory changes, price increases, promotional activity and purchase commitments can cause significant quarterly volatility.
- Goodwill and indefinite-lived intangible valuations remain sensitive to forecast cash flows, discount rates, market conditions and execution. Future impairments remain possible.
- The SEC is investigating the company’s accounting and disclosures; the company is cooperating and cannot predict the outcome or potential impact.
- The company is defending securities class actions, a derivative action, employment-related litigation and other claims arising from the merger and business operations.
- An IRS dispute regarding a $546.0 million worthless-stock deduction could result in a material charge if resolved adversely. The company has not accrued a liability.
- Swedish tax authorities have challenged certain interest deductions; the potential additional tax expense is approximately $41.0 million if the deductions are disallowed.
Most Important Facts to Verify
- Whether the transformation plan delivers the stated 2020 and 2022 margin targets and $200 million to $225 million of annual savings.
- Whether Technologies & Equipment growth can offset continued weakness in Consumables.
- The sustainability of adjusted margin improvement after restructuring costs, severance, impairments and other excluded items.
- Progress on debt refinancing, the September 2019 Japanese yen borrowing and the company’s liquidity after dividends, repurchases and restructuring expenditures.
- Developments in the SEC investigation, IRS dispute, Swedish tax matter and merger-related securities litigation.
- The impact of foreign exchange, distributor inventory movements and potential future goodwill or intangible-asset impairments.