DENTSPLY SIRONA Inc. 2016 Form 10-K Summary
Business Context and Reporting Period
Dentsply Sirona is a global manufacturer of professional dental products, technologies and selected healthcare consumables, operating in more than 120 countries through two segments: Dental and Healthcare Consumables, and Technologies. The fiscal year ended December 31, 2016 includes Sirona’s results from February 29, 2016, the date of the all-stock merger, through year-end; 2015 reflects legacy DENTSPLY only unless otherwise stated.
The merger issued approximately 101.8 million DENTSPLY shares and had stated acquisition consideration of $6.26 billion. Sirona contributed $1.04 billion of net sales and $227.2 million of operating income during the ten-month post-merger period.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $3,745.3 million | $2,674.3 million | 40.0% |
| Net sales excluding precious metal content | $3,681.0 million | $2,581.5 million | 42.6% |
| Gross profit | $2,000.9 million | $1,517.2 million | 31.9% |
| Gross margin excluding precious metal content | 54.4% | 58.8% | Down 440 basis points |
| Operating income | $454.7 million | $375.2 million | 21.2% |
| Operating margin excluding precious metal content | 12.4% | 14.5% | Down 210 basis points |
| Net income attributable to Dentsply Sirona | $429.9 million | $251.2 million | 71.2% |
| Diluted EPS | $1.94 | $1.76 | 10.2% |
| Adjusted diluted EPS | $2.78 | $2.62 | 5.7% |
| Cash flow from operations | $563.4 million | $497.4 million | 13.3% |
| Capital expenditures | $125.0 million | $72.0 million | 73.6% |
| Cash and cash equivalents | $383.9 million | $284.6 million | 34.9% |
| Total debt | $1,532.2 million | $1,153.1 million | 32.9% |
| Net debt to total capitalization | 12.4% | 27.1% | Improved |
- Segment sales excluding precious metal content were $1,994.3 million for Dental and Healthcare Consumables, up 6.7%, and $1,686.7 million for Technologies, up 136.7%, primarily reflecting the merger.
- Segment operating income was $544.5 million for Dental and Healthcare Consumables and $355.1 million for Technologies.
- Combined-business sales, presented on a pro forma non-GAAP basis, grew 3.6% on a constant-currency basis, including a 1.7% acquisition benefit and approximately 2.4% internal growth.
- The effective tax rate was 2.2%, versus 23.4% in 2015, primarily due to a $72.6 million tax benefit from releasing a valuation allowance on foreign interest deduction carryforwards related to the merger. Excluding these and other discrete tax items, management reported an effective rate of 18.9%.
- Adjusted operating income was $804.2 million, or 21.8% of sales excluding precious metal content, compared with $521.1 million, or 20.2%, in 2015.
Material Changes Versus the Prior Comparable Period
- The merger materially increased reported sales, assets, goodwill, intangible assets, share count and debt. Reported year-over-year growth is therefore not directly comparable with 2015 standalone DENTSPLY results.
- Gross margin declined because of the roll-off of merger-related fair-value adjustments, Sirona’s lower gross margin profile and foreign-currency effects, partly offset by integration savings and pricing.
- Net income benefited from merger-related scale, lower interest expense, foreign-exchange gains and discrete tax benefits. Adjusted results provide a more comparable view of operating performance.
- The Company acquired MIS Implants Technologies and a healthcare consumables business in September 2016 for aggregate consideration of approximately $341.4 million, including $206.4 million of preliminary goodwill.
- Operating cash flow increased, but working capital consumed $153.4 million, with receivable days rising to 58 from 54 and inventory days rising to 113 from 110.
- The Company repurchased approximately 13.4 million shares for $815.1 million and paid $64.6 million of dividends during 2016.
Liquidity, Debt and Capital Resources
- Long-term debt, including the current portion, was $1,522.1 million at December 31, 2016, compared with $1,150.2 million at year-end 2015. The increase primarily financed acquisitions and refinancing of maturities.
- The Company had no borrowings under its $500 million multicurrency revolving credit facility and reported $549.4 million of unused revolving and uncommitted short-term credit capacity, including $10.1 million outstanding under short-term lines.
- Debt covenants included a maximum debt-to-total-capital ratio of 0.6 to 1.0 and a minimum operating income excluding depreciation and amortization-to-interest expense ratio of 3.0 times. The Company was in compliance at year-end.
- Contractual obligations totaled $2.15 billion, including $1.53 billion of long-term borrowings, $182.2 million of operating leases, $222.2 million of net interest obligations and $181.4 million of postemployment obligations.
- Management expected 2017 capital expenditures of approximately $120 million to $140 million and stated that ongoing liquidity needs, including debt service, repurchases and potential acquisitions, could be funded from cash, operating cash flow and available credit facilities.
Guidance, Outlook, Commentary and Risks
- Management did not provide a clear consolidated 2017 revenue or EPS guidance figure in the filing.
- The Patterson distribution relationship is changing from exclusive to non-exclusive for certain legacy Sirona products in the United States and Canada after September 2017. Inventory reductions and reduced sales resources negatively affected fourth-quarter 2016 sales by approximately $30 million, and management estimated that continued inventory reductions could adversely affect 2017 sales by approximately $50 million.
- The Company planned manufacturing, logistics and distribution reorganizations, primarily in Germany and other regions. Estimated costs could reach $83 million, primarily severance, over the following two years.
- Management cited integration execution, realization of merger synergies, distributor concentration, foreign exchange, healthcare reimbursement and regulatory changes, product liability, litigation, cybersecurity, supply constraints and goodwill impairment as significant risks.
- Approximately two-thirds of sales were outside the United States, creating material exposure to currency movements. The stronger U.S. dollar reduced 2016 sales excluding precious metal content by approximately 1.2% and diluted EPS by approximately $0.08.
- Goodwill and other intangible assets totaled $8.91 billion, including $5.95 billion of goodwill. No impairment was recorded in 2016, but several merger-created reporting units had limited headroom and could be sensitive to lower growth, higher discount rates or weaker cash flows.
- Outstanding legal matters included product-related class actions and a False Claims Act matter under appeal. The Company did not believe a loss was probable and could not estimate a reasonable loss range. Export-control and economic-sanctions inquiries by U.S. authorities remained unresolved, with the tolling agreement extended through May 1, 2017.
- The Company’s financial statements and internal control over financial reporting received unqualified opinions from PricewaterhouseCoopers LLP.
Most Important Facts for Investors to Verify
- Separate merger-driven growth from underlying constant-currency internal growth of approximately 2.4%.
- Assess whether the Patterson transition and expected 2017 inventory reductions caused the anticipated approximately $50 million sales headwind.
- Reconcile GAAP EPS of $1.94 with adjusted EPS of $2.78, including merger, amortization, restructuring and tax adjustments.
- Monitor gross-margin recovery, integration savings and the execution and cost of the restructuring program.
- Review debt maturities, covenant headroom, foreign-currency exposure and the availability of the revolving credit facility.
- Evaluate the sustainability of the unusually low 2.2% effective tax rate after the merger-related $72.6 million tax benefit.
- Track goodwill and indefinite-lived intangible asset headroom, particularly for merger-created Technologies reporting units.
- Follow developments in the export-control inquiries, pending litigation and any related reserves or settlements.