DENTSPLY SIRONA Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 2, 2020. The filing is an annual report, with fourth-quarter information provided in unaudited quarterly data. Dentsply Sirona is a global manufacturer of professional dental products, technologies and equipment, plus healthcare consumables, operating in more than 120 countries through two segments: Technologies & Equipment and Consumables.
Business Context and Reporting Period
- Dental products and technologies represented approximately 92% of 2019 consolidated sales.
- Technologies & Equipment includes CAD/CAM, imaging, treatment centers, implants, orthodontics, instruments and healthcare consumables.
- Consumables includes preventive, restorative, endodontic and dental laboratory products.
- Approximately two-thirds of dental consumable and technology sales are distributed through third parties. Henry Schein represented approximately 13% of 2019 consolidated sales; Henry Schein and Patterson together represented approximately 20%.
- Approximately two-thirds of sales are outside the United States, creating material foreign-exchange and international operating exposure.
Financial Performance and Key Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $4,029.2 million | $3,986.3 million | Up 1.1% |
| Net sales excluding precious metals | $3,988.1 million | $3,949.1 million | Up 1.0% |
| Gross profit | $2,165.1 million | $2,067.8 million | Up 4.7% |
| Gross margin excluding precious metals | 54.3% | 52.4% | Up 190 basis points |
| Operating income | $360.9 million | $(958.1) million | Improved by $1,319.0 million |
| Net income attributable to Dentsply Sirona | $262.9 million | $(1,011.0) million | Improved by $1,273.9 million |
| Diluted EPS | $1.17 | $(4.51) | Returned to profitability |
| Adjusted net income | $549.9 million | $454.5 million | Up 21.0% |
| Adjusted diluted EPS | $2.45 | $2.01 | Up 22.0% |
| Cash flow from operations | $632.8 million | $499.8 million | Up $133.0 million |
| Capital expenditures | $122.9 million | $182.5 million | Down $59.6 million |
GAAP operating margin was approximately 9.0% of sales excluding precious metal content. Adjusted operating income was $742.1 million, or an adjusted margin of 18.6%, compared with $614.2 million and 15.5% in 2018. Adjusted measures exclude, among other items, purchased-intangible amortization, restructuring and other costs, and business-combination-related items.
Segment Results
| Segment | 2019 sales excluding precious metals | Sales change | 2019 segment operating income | Income change |
|---|---|---|---|---|
| Technologies & Equipment | $2,283.2 million | Up 5.3% | $431.4 million | Up 55.2% |
| Consumables | $1,704.9 million | Down 4.3% | $437.1 million | Down 5.0% |
Internal sales growth, excluding currency, acquisitions, divestitures and discontinued products, was 5.7%. Technologies & Equipment internal growth was 11.5%, led by Digital Dentistry, Equipment & Instruments and Healthcare. Consumables internal sales declined 1.3%, primarily because of weakness in Laboratory and Endodontic products.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents increased to $404.9 million from $309.6 million.
- Total debt, including current and long-term portions, was $1,433.3 million, down from $1,575.5 million. Net debt to total capitalization declined to 16.8% from 20.8%.
- The company had no borrowings under its $700.0 million revolving credit facility or commercial paper facility at year-end, and reported $735.9 million of unused credit lines including other short-term facilities.
- The company was in compliance with debt covenants, including a maximum debt-to-total-capital ratio of 0.6 to 1.0 and a minimum operating-income-before-depreciation-and-amortization-to-interest-expense ratio of 3.0 times.
- Financing cash uses included $260.0 million of share repurchases, $80.9 million of dividends, and net debt repayments of approximately $200.8 million across long- and short-term borrowings.
- The company repurchased 4.8 million shares in 2019 at an average price of $54.18; $489.8 million remained available under the repurchase authorization at December 31, 2019.
- Contractual obligations totaled approximately $2.1 billion, including $1.4 billion of long-term borrowings, $177.5 million of operating leases, $192.4 million of interest and $211.1 million of postemployment obligations.
Material Changes Versus the Prior Comparable Period
- 2019 returned to GAAP profitability after a 2018 loss caused primarily by a $1,085.8 million goodwill impairment charge and $179.2 million of indefinite-lived intangible impairments. No goodwill impairment was recorded in 2019; $5.3 million of tradename and trademark impairment was recorded in the first quarter.
- Restructuring and other costs declined to $80.7 million from $221.0 million, although the company recorded approximately $192 million of expenses and charges related to its broader restructuring plan during 2019, including approximately $73 million of non-cash charges.
- Gross margin improved 190 basis points, primarily from cost savings, headcount reductions, expense reclassification and divestitures of lower-margin businesses.
- U.S. sales excluding precious metals increased 7.7%, while Europe declined 3.4% and Rest of World declined 0.4% on a reported basis. Currency reduced sales growth by approximately 3.3%.
- The company adopted the new lease standard, ASC 842, on January 1, 2019, recognizing $159.3 million of operating lease right-of-use assets and $163.2 million of operating lease liabilities at year-end.
- Capital expenditures declined materially, while operating cash flow increased by approximately 27%.
Guidance, Outlook, Commentary and Unusual Items
- The restructuring plan targets annualized revenue growth of 3% to 4%, an adjusted operating margin of 20% by the end of 2020, 22% by 2022 and $200 million to $225 million of net annual cost savings by 2021.
- By December 31, 2019, management reported approximately $88 million of savings and a global headcount reduction of approximately 7%, within the targeted 6% to 8% reduction. Approximately $275 million of one-time expenditures and charges are expected through 2021.
- Management expected 2020 capital expenditures of approximately $140 million to $150 million and restructuring cash payments of approximately $50 million to $100 million.
- The filing does not provide a formal 2020 revenue or EPS outlook.
- Management identified distributor inventory levels, price changes, product launches, seasonality, currency, competitive pricing and ongoing restructuring as significant drivers of quarterly volatility.
- In January 2020, the company experienced a phishing cyberattack that propagated to certain servers; management stated it was contained and had not materially affected the company as of the filing.
- The company sources some raw materials from China and noted that the coronavirus outbreak emerging in December 2019 could affect sourcing, although the eventual financial impact was uncertain.
- The SEC Division of Enforcement requested documents and information concerning the company’s accounting and disclosures. The company is cooperating and could not predict the outcome or whether it would be material.
- The IRS disputed a $546.0 million 2013 worthless-stock deduction and asserted a potential $17.1 million 2014 tax deficiency, excluding interest. The company has not accrued a liability and believes its position is more likely than not to be sustained.
- Swedish tax authorities disallowed certain interest deductions; an adverse resolution could result in approximately $41.0 million of additional tax expense. The company is appealing and has not accrued the potential liability.
- Pending securities class actions and a derivative action relate principally to alleged misstatements surrounding the Sirona merger, distributor inventory and business prospects. The company intends to defend the matters vigorously.
Key Investor Verification Items
- Verify progress toward the restructuring targets, including the $200 million to $225 million annual savings goal, 2020 and 2022 adjusted-margin targets, remaining charges and cash payments.
- Assess whether Technologies & Equipment growth, particularly Digital Dentistry, can offset continued Consumables weakness.
- Reconcile GAAP earnings with adjusted earnings and evaluate the recurring nature of excluded amortization, restructuring, impairment and other adjustments.
- Monitor goodwill and intangible-asset sensitivity, especially CAD/CAM, Imaging, Treatment Centers and other Technologies & Equipment reporting units.
- Review distributor concentration, distributor inventory levels and the continuing strategic relationships with Patterson and Henry Schein.
- Track debt maturities, covenant headroom, refinancing needs and the company’s ability to fund buybacks, dividends, restructuring and acquisitions.
- Follow the SEC inquiry, IRS and Swedish tax disputes, securities litigation and any related accruals or disclosures.
- Evaluate exposure to foreign exchange, China-related supply-chain disruption, Brexit and the European Medical Device Regulation effective in 2020.