DENTSPLY International Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. The filing is by DENTSPLY International Inc.; the company name was expected to change to DENTSPLY SIRONA Inc. upon completion of the proposed Sirona merger.
Business Context
DENTSPLY manufactures and distributes dental consumables, laboratory products, specialty dental products, and consumable medical devices in more than 120 countries. Professional dental products represented approximately 88% of sales. The company reported three operating segments: Dental Consumables, Endodontic and Dental Laboratory; Healthcare, Orthodontic and Implant; and Select Developed and Emerging Markets.
Key Financial Metrics
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $648.9 million | $708.2 million | $2,003.2 million | $2,203.6 million |
| Net sales excluding precious metals | $629.3 million | $681.6 million | $1,935.6 million | $2,101.7 million |
| Gross profit | $369.5 million | $388.1 million | $1,142.5 million | $1,206.7 million |
| Operating income | $98.6 million | $109.6 million | $282.1 million | $342.3 million |
| Net income attributable to DENTSPLY | $84.5 million | $75.3 million | $192.6 million | $238.1 million |
| Diluted EPS | $0.59 | $0.52 | $1.35 | $1.65 |
| Operating cash flow | $159.7 million | $147.5 million | $371.0 million | $367.7 million |
Q3 gross margin was 56.9% on reported sales and 58.7% excluding precious metal content, compared with 54.8% and 56.9%, respectively, in the prior-year quarter. Reported operating margin was 15.7% versus 16.1%; adjusted operating margin was approximately 21.0% versus 18.7%. The nine-month reported operating margin was 14.6% versus 16.3%, while adjusted operating margin was 20.3% versus 18.6%.
At September 30, 2015, cash and cash equivalents were $236.4 million. Total debt, including current and long-term portions, was approximately $1.155 billion based on the balance sheet, while the estimated fair value of total debt was $1.178 billion. Total net debt to total capitalization was 28.7%, compared with 32.3% at December 31, 2014. The company reported $553.4 million of available borrowing capacity and no borrowings under its multi-currency revolving facility.
Material Changes Versus Prior Period
- Q3 reported sales declined 8.4%; sales excluding precious metal content declined 7.7%, primarily due to 9.1% unfavorable foreign-currency translation. Constant-currency sales excluding precious metal content increased 1.4%.
- Nine-month reported sales declined 9.1%; sales excluding precious metal content declined 7.9%, reflecting 9.9% unfavorable currency translation. Constant-currency sales increased 2.0%.
- Internal sales growth was 1.7% in Q3 and 2.3% for the nine months, with growth led by the United States and Rest of World markets. Q3 sales were also affected by product discontinuations and a temporary interruption at the Tianjin, China facilities following an August explosion.
- Q3 net income attributable to DENTSPLY increased 12.2% and diluted EPS increased from $0.52 to $0.59, despite lower reported sales. The improvement reflected higher gross margins, lower interest expense, favorable other income, and $10.8 million of equity income from DIO versus a $1.0 million loss in the prior-year quarter.
- Nine-month net income attributable to DENTSPLY declined 19.1% and diluted EPS declined 18.2%, primarily because of substantially higher restructuring costs, an unfavorable tax-rate change, currency effects, and lower equity results from DIO.
- Restructuring and other costs rose to $6.6 million in Q3 and $50.9 million for nine months, from $2.5 million and $4.5 million, respectively. The charges primarily related to laboratory-business reorganization and global efficiency initiatives.
- Operating cash flow increased modestly for the nine months despite lower net income. Financing uses included $112.7 million for treasury-stock purchases, $29.9 million of dividends, $80.4 million to acquire remaining minority interests, and $109.1 million of long-term debt repayments.
Guidance, Outlook, Risks and Unusual Items
- Management expects additional 2015 restructuring costs of approximately $8 million to $12 million and estimates annual savings of $25 million to $32 million over three to five years; achievement of these savings is not assured.
- Management targets adjusted operating margins of approximately 20% over time, net of reinvestment, as efficiency initiatives take effect. The filing does not provide formal revenue or EPS guidance.
- DENTSPLY and Sirona announced a stock-for-stock merger of equals on September 15, 2015, expected to close in the first quarter of 2016, subject to shareholder, regulatory, and other customary approvals. Sirona shareholders would receive 1.8142 DENTSPLY shares per Sirona share.
- The merger could involve integration challenges, employee departures, regulatory conditions, dilution, substantial transaction costs, and failure-to-close risks. Specified termination fees could reach $280 million payable by DENTSPLY or $205 million payable by Sirona, plus up to $15 million of expense reimbursement.
- On October 29, 2015, the company announced a tender offer for up to $150 million of its 4.125% notes due 2021. Estimated total consideration was $160.3 million, to be funded with new debt or available liquidity.
- Foreign-exchange exposure is significant because more than 60% of sales are outside the United States. The company uses foreign-exchange, interest-rate, and commodity derivatives to manage market risk.
- Outstanding contingencies include product-related class actions, a qui tam action, export-control and sanctions inquiries, and litigation related to the Sirona merger. Management did not believe a loss was probable for the disclosed litigation and could not estimate a reasonable loss range; unfavorable resolutions could materially affect results.
- The annual goodwill and indefinite-lived intangible-asset impairment tests identified no impairment. However, management disclosed sensitivity to weaker operating results, valuation declines, and higher discount rates.
- The company sold its DIO convertible bonds for $47.7 million during Q3. It relinquished its DIO board representation and expected to account for its remaining DIO investment under the cost method beginning in Q4 2015.
Facts Investors Should Verify
- Completion timing, approvals, financing, dilution, integration costs, and termination provisions for the Sirona merger.
- Whether restructuring investments produce the projected $25 million to $32 million of annual savings and whether additional charges exceed current estimates.
- Underlying constant-currency sales growth versus reported declines caused by foreign exchange, including the recovery of the Tianjin operations.
- Debt maturities and refinancing requirements, particularly the $75 million Private Placement Notes payment due in February 2016 and other current debt.
- Progress and potential financial exposure from product litigation, the qui tam action, export-control inquiries, and merger-related shareholder litigation.
- Future DIO investment accounting and the effect of discontinued equity-method earnings after the loss of significant influence.