DENTSPLY International Inc. — FY2011 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2011, with quarterly information for the fourth quarter. The registrant was DENTSPLY International Inc.; the supplied metadata identifies DENTSPLY Sirona, but that name does not appear in the filing. The company designs, manufactures and distributes professional dental products and consumable medical devices in more than 120 countries. Approximately 93% of 2011 sales, excluding precious-metal content, came from dental products, and approximately 66% came from customers outside the United States.
Astra Tech AB was acquired on August 31, 2011. Its results are included from September 1 through December 31, 2011, contributing $207.1 million of sales and an $18.5 million operating loss.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $2.538 billion | $2.221 billion | 14.3% increase |
| Net sales excluding precious-metal content | $2.333 billion | $2.032 billion | 14.8% increase |
| Gross profit | $1.273 billion | $1.130 billion | 12.7% increase |
| Gross margin excluding precious-metal content | 54.6% | 55.6% | 100 basis-point decline |
| Operating income | $300.7 million | $380.3 million | 21.0% decrease |
| Net income attributable to DENTSPLY | $244.5 million | $265.7 million | 8.0% decrease |
| Diluted EPS | $1.70 | $1.82 | Decrease of $0.12 |
| Cash flow from operations | $393.5 million | $377.5 million | $16.0 million increase |
| Capital expenditures | $71.2 million | $44.2 million | Increase |
Reported net-sales growth excluding precious-metal content consisted of 11.2% constant-currency growth, including 10.8% acquisition growth and 0.4% internal growth, plus a 3.6% favorable currency-translation effect. Excluding the Japanese and orthodontic businesses, internal growth was approximately 3.9%.
The effective tax rate was 4.3%, compared with 25.0% in 2010, primarily because of a $46.7 million tax benefit from releasing a valuation allowance on previously unrecognized tax-loss carryforwards and changes in the geographic mix of earnings. Adjusted non-GAAP diluted EPS was $2.03, compared with $1.94 in 2010; the filing cautions that this measure is not a substitute for GAAP EPS.
Balance sheet, debt and liquidity
- Cash and cash equivalents declined to $77.1 million from $540.0 million, principally because of the Astra Tech acquisition.
- Total debt and notes payable increased to $1.767 billion from $611.8 million. Long-term debt, including the current portion, increased to $1.491 billion from $606.5 million.
- Long-term debt as a percentage of total capitalization increased to 44.2% from 24.1%.
- Available unused credit lines totaled $548.2 million at December 31, 2011, including committed revolving facilities and uncommitted short-term lines.
- Operating cash flow funded ongoing operations, but 2011 investing cash flow was negative $1.887 billion, including $1.788 billion for acquisitions and $71.2 million of capital expenditures.
- The company issued $1.0 billion of senior unsecured notes to partially fund Astra Tech. Debt included a $250 million floating-rate tranche due 2013, a $300 million fixed-rate tranche due 2016 and a $450 million fixed-rate tranche due 2021.
- Management reported compliance with applicable debt covenants at year-end. The company was required to maintain a consolidated debt-to-EBITDA ratio of no more than 4.00 to 1.00 through September 30, 2012, declining to 3.50 to 1.00 thereafter under specified debt documentation.
Material changes versus the prior comparable period
- Astra Tech materially expanded dental implant, urology and surgery product lines, adding approximately $1.6 billion of goodwill and identifiable intangible assets to the balance sheet. Purchase accounting remained preliminary at year-end.
- SG&A expense increased 26.8% to $936.8 million, and SG&A as a percentage of sales excluding precious-metal content rose to 40.2% from 36.4%, reflecting acquisition costs, Astra Tech’s cost structure, orthodontic continuity costs and product-launch spending.
- Restructuring and other costs increased to $35.9 million from $11.0 million, including $18.0 million of Astra Tech acquisition-related costs, a $12.6 million legal settlement and restructuring and technology-impairment costs.
- The March 2011 Japan disaster disrupted a key orthodontic supplier. The affected products represented approximately 9% of 2010 sales excluding precious-metal content. The disruption reduced 2011 diluted EPS by approximately $0.15, with normal supply not expected until mid-2012.
- Segment operating income declined despite higher sales: the consumables segment increased to $185.4 million, while the Europe/Pacific Rim segment declined to $12.2 million, the Canada/Latin America/Endodontics/Orthodontics/Astra Tech segment declined to $161.7 million, and the Dental Laboratory/Implants/Non-Dental segment declined to $79.9 million.
- Accumulated other comprehensive income declined to a $191.0 million loss from income of $24.2 million, primarily because of foreign-currency translation losses.
Guidance, outlook, risks and unusual items
- Management’s long-term internal-growth target is 4% to 6%, but it expected 2012 internal growth to be slightly below that range because of global economic conditions.
- Management expected the orthodontic supply disruption to improve sequentially beginning in the second quarter of 2012, with negative year-over-year comparisons continuing through the third quarter.
- Key risks include integration of Astra Tech, elevated leverage and debt-service requirements, covenant compliance, foreign-exchange volatility, European sovereign-debt and customer-credit conditions, regulatory approval and product-liability exposure, competition, product recalls, and dependence on limited or single-source suppliers.
- The company had approximately $136.8 million of precious metals held on consignment. Loss of these arrangements could create a financing and inventory-valuation need.
- Pending Cavitron-related litigation had no reasonably estimable loss range at December 31, 2011; an unfavorable resolution could materially affect results.
- The company recorded no goodwill impairment in its 2011 annual testing, but goodwill and intangible assets totaled approximately $2.981 billion and remain sensitive to assumptions regarding growth, discount rates and future cash flows.
- Management and PricewaterhouseCoopers concluded that internal control over financial reporting was effective, excluding Astra Tech from the 2011 assessment because of the acquisition. Astra Tech represented $1.1 billion of consolidated assets and $207.1 million of consolidated revenue.
Investor verification checklist
- Verify the legal registrant and ticker context: the filing is for DENTSPLY International Inc., not an entity named DENTSPLY Sirona.
- Separate acquisition-driven sales growth from underlying growth and assess Astra Tech’s reported operating loss and integration costs.
- Reconcile GAAP diluted EPS of $1.70 with adjusted diluted EPS of $2.03 and evaluate whether excluded costs are recurring.
- Review debt maturities, leverage-covenant calculations, variable-rate exposure and available revolver capacity.
- Assess the expected timing and financial impact of the Japan orthodontic supply recovery.
- Evaluate the preliminary Astra Tech purchase-price allocation, including $969.6 million of goodwill and $793.0 million of identifiable intangible assets.
- Review pending litigation, tax contingencies, supplier concentration and the effect of foreign-exchange movements on earnings and equity.