DENTSPLY International Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
DENTSPLY International Inc. reported for the fiscal year ended December 31, 2015. The company designs, manufactures and distributes dental consumables, laboratory products, specialty dental products and consumable medical devices in more than 120 countries. Dental products represented approximately 88% of sales excluding precious metal content, and approximately 63% of such sales were generated outside the United States.
The filing is an annual report rather than a standalone fourth-quarter filing; quarterly information is included for reference. The company operated through three reportable segments, with prior-year segment information recast to conform to the 2015 presentation.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $2,674.3 million | $2,922.6 million | (8.5%) |
| Net sales excluding precious metal content | $2,581.5 million | $2,792.7 million | (7.6%) |
| Gross profit | $1,517.2 million | $1,599.8 million | (5.2%) |
| Gross margin excluding precious metal content | 58.8% | 57.3% | +150 basis points |
| Operating income | $375.2 million | $445.6 million | (15.8%) |
| Operating margin excluding precious metal content | 14.5% | 16.0% | (150 basis points) |
| Adjusted operating income | $521.1 million | $512.8 million | +1.6% |
| Adjusted operating margin | 20.2% | 18.4% | +180 basis points |
| Net income attributable to DENTSPLY | $251.2 million | $322.9 million | (22.2%) |
| Diluted EPS | $1.76 | $2.24 | (21.4%) |
| Adjusted diluted EPS | $2.62 | $2.50 | +4.8% |
| Cash flow from operations | $497.4 million | $560.4 million | (11.2%) |
| Capital expenditures | $72.0 million | $99.6 million | (27.7%) |
| Cash and cash equivalents | $284.6 million | $151.6 million | +$133.0 million |
| Total debt | $1,153.1 million | $1,261.9 million | (8.6%) |
| Net debt to total capitalization | 27.1% | 32.3% | (520 basis points) |
Reported sales were significantly reduced by approximately 9.5% unfavorable foreign-currency translation. Excluding currency and precious metal content, internal sales growth was 2.0% and constant-currency sales growth was 1.9%. U.S. constant-currency sales grew 2.6%, Europe declined 0.3%, and the rest of the world grew 5.3%.
Segment sales excluding precious metal content declined across all segments: Dental Consumables, Endodontic and Dental Laboratory Businesses decreased 4.3% to $1,155.6 million; Healthcare, Orthodontic and Implant Businesses decreased 9.2% to $968.5 million; and Select Developed and Emerging Markets Businesses decreased 11.7% to $457.4 million. Segment operating income was $411.3 million, $121.7 million and negative $9.4 million, respectively.
Net interest expense increased to $53.7 million, including $15.5 million of bond-tender-related costs. The effective tax rate increased to 23.4% from 20.1%, partly due to prior-year tax matters and the absence of certain 2014 tax benefits. Research and development spending was $74.9 million, compared with $80.8 million in 2014.
Material changes versus the prior comparable period
- Reported sales and GAAP earnings declined primarily because of the stronger U.S. dollar, lower precious metal sales and increased restructuring and transaction-related costs.
- Gross margin and adjusted operating margin improved, reflecting pricing, product mix and global efficiency initiatives despite lower reported revenue.
- Restructuring and other costs increased to $64.7 million from $11.1 million. The 2015 plans primarily involved laboratory-business reorganization, manufacturing changes and workforce reductions.
- Management estimated additional 2016 restructuring costs of $4 million to $6 million and expected annual savings of approximately $25 million to $32 million over three to five years, subject to execution risk.
- Operating cash flow decreased by $63.0 million, but cash increased by $133.0 million after operating, investing and financing activities.
- Total debt declined by approximately $108.8 million. The company completed a $153.9 million tender for 2021 senior notes and arranged delayed-draw private-placement notes to refinance upcoming maturities.
- The company repurchased 2.1 million shares for $112.7 million during 2015 and increased its quarterly dividend to $0.0725 per share, or $0.290 for the year.
Guidance, outlook, management commentary and unusual items
Management described the long-term dental-market growth opportunity as approximately 3% to 6% annually and targeted growth modestly above the market. It stated that adjusted operating margins had reached the targeted level of at least 20% at year-end and expected to operate at or above that level over time, although currency, reinvestment, restructuring and merger integration could affect future results.
On September 15, 2015, DENTSPLY announced an all-stock merger of equals with Sirona Dental Systems. Stockholders approved the transaction on January 11, 2016. Closing was expected in the first quarter of 2016, subject to regulatory approvals and other conditions. Sirona stockholders were to receive 1.8142 DENTSPLY shares per Sirona share; expected post-closing ownership was approximately 58% for existing DENTSPLY stockholders and 42% for existing Sirona stockholders.
The merger could result in substantial integration expenses, dilution, management distraction, employee losses, regulatory conditions or failure to realize projected synergies. Termination fees could be $280 million for DENTSPLY or $205 million for Sirona in specified circumstances, plus possible expense reimbursement of up to $15 million.
Other unusual items included a $51.1 million acquisition of a South American dental-laboratory manufacturer, the sale of DIO convertible bonds, a change from equity-method to cost-basis accounting for the remaining DIO investment, and a $3.7 million impairment of identifiable intangible assets. No goodwill impairment was recorded in 2015.
Liquidity, debt and contingencies
The company reported $548.9 million of unused credit availability at December 31, 2015, including its revolving credit facility and uncommitted short-term lines. It stated that operating cash flow, cash balances and available credit were expected to fund capital expenditures, debt service, stock repurchases, leases and potential acquisitions. Planned 2016 debt maturities were expected to be refinanced primarily through delayed-draw private-placement notes.
Debt agreements required a debt-to-total-capital ratio no greater than 0.6 to 1.0 and operating income less depreciation and amortization to interest expense of at least 3.0 times. The company reported compliance at year-end.
Material risks include foreign-exchange exposure, competitive and technological pressures, regulatory compliance, product liability and recalls, supply-chain concentration, litigation, tax contingencies, goodwill and intangible-asset impairment, cybersecurity and the ability to service and refinance debt. The company was cooperating with U.S. authorities regarding export-control and economic-sanctions inquiries; the ultimate outcome and potential financial impact were not predictable.
Pending litigation included product-related class actions, a False Claims Act qui tam action and litigation challenging the Sirona merger. Management did not believe a loss was probable in the disclosed matters and stated that a reasonable loss range could not be estimated, but acknowledged that an unfavorable resolution could materially affect results.
Most important facts for an investor to verify
- Whether the Sirona transaction closed as expected, the final purchase accounting, integration costs, synergies and any resulting share dilution.
- Whether constant-currency growth and adjusted margins are sustainable after separating currency effects and excluding restructuring, amortization and transaction costs.
- The refinancing and repayment of 2016 debt maturities and continued compliance with debt covenants.
- The cash cost and effectiveness of restructuring programs, including the projected $25 million to $32 million annual savings.
- Exposure to foreign-currency movements, particularly because approximately two-thirds of sales were outside the United States.
- The status and potential exposure from export-control inquiries, False Claims Act litigation, product litigation and merger-related lawsuits.
- The recoverability of goodwill, intangible assets and deferred tax assets, including the $274.3 million deferred-tax-asset valuation allowance.
- Customer concentration, including Henry Schein, which represented 11% of 2015 consolidated sales.