DENTSPLY SIRONA Inc. 2019 Q1 Form 10-Q Summary
Business Context and Reporting Period
DENTSPLY SIRONA is a global dental-products and technology company serving the professional dental market, with approximately 92% of sales from professional dental products. The company reports two segments: Technologies & Equipment and Consumables. This unaudited report covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Financial Performance and Liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $946.2 million | $956.1 million | (1.0%) |
| Net sales excluding precious metals | $935.0 million | $945.8 million | (1.1%) |
| Gross profit | $499.7 million | $514.1 million | (2.8%) |
| Gross margin on reported sales | 52.8% | 53.8% | (100 bps) |
| Operating income | $47.3 million | $68.7 million | (31.1%) |
| Net income attributable to DENTSPLY SIRONA | $39.2 million | $81.2 million | (51.7%) |
| Diluted EPS | $0.17 | $0.35 | Down $0.18 |
| Adjusted diluted EPS | $0.49 | $0.45 | Up $0.04 |
| Cash flow from operations | $29.3 million | $55.1 million | (46.8%) |
Reported sales declined 1.0%, while sales excluding precious-metal content grew 3.6% on a constant-currency basis. Internal sales growth was 3.9%, including a 60-basis-point acquisition benefit and a 90-basis-point unfavorable discontinued-product impact. Adjusted operating income increased to $145.5 million, or 15.6% of sales excluding precious-metal content, from $137.6 million, or 14.5%, in the prior-year quarter.
Technologies & Equipment sales excluding precious-metal content increased 2.1% to $520.8 million, and segment adjusted operating income increased 4.8% to $71.8 million. Consumables sales declined 4.9% to $414.2 million, and segment adjusted operating income declined 7.8% to $105.7 million.
Cash and cash equivalents were $225.4 million at March 31, 2019, compared with $309.6 million at December 31, 2018. Total debt was approximately $1.57 billion, consisting primarily of $1.55 billion of long-term debt and $20.7 million of current debt. Net debt to total capitalization was 20.8%. The company had $719.9 million of unused credit capacity and was in compliance with all debt covenants.
Operating cash flow was reduced by restructuring and legal settlement payments, lower collections relative to the prior year, and working-capital movements. Investing cash outflow was $12.7 million, including $33.9 million of capital expenditures. Financing cash outflow was $99.2 million, including $67.9 million of short-term borrowing repayments, $19.5 million of dividends, and $30.6 million paid for contingent consideration related to prior acquisitions.
Material Changes Versus the Prior Comparable Period
- Net income declined primarily because Q1 2018 included a significant gain on the sale of marketable securities; Q1 2019 included a smaller gain related primarily to the sale of a non-strategic business.
- Operating income was pressured by higher restructuring and other costs of $20.5 million versus $10.2 million, including $5.3 million of intangible-asset impairment charges.
- Gross margin excluding precious-metal content decreased to 53.4% from 54.4%, principally due to divestiture-related expenses and higher manufacturing and distribution costs.
- Foreign-exchange translation produced a $61.0 million after-tax comprehensive loss versus a $65.7 million gain in Q1 2018, contributing to accumulated other comprehensive loss of $537.4 million at March 31, 2019.
- The company adopted the new lease standard, ASC 842, on January 1, 2019, recognizing $163.9 million of operating lease right-of-use assets and $167.4 million of operating lease liabilities at March 31, 2019.
- The company paid the $30.0 million earn-out associated with the 2018 OraMetrix acquisition.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management’s restructuring plan targets annualized topline 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 annual net cost savings by 2021. The plan anticipates a 6% to 8% reduction in the global workforce and approximately $275 million of one-time expenditures and charges. Management cautions that these targets and savings may not be achieved.
Planned 2019 capital expenditures are approximately $165 million to $175 million. Management continues to evaluate debt refinancing and expects foreign exchange, distributor inventory levels, pricing activity, trade-show timing, product launches, acquisitions, and divestitures to affect quarterly results.
Key contingencies include an SEC investigation concerning accounting and disclosures; securities-related class actions and derivative litigation connected with the DENTSPLY-Sirona merger and alleged distributor conduct; employment-related litigation; an IRS challenge to a $546.0 million worthless-stock deduction that could result in a $17.1 million 2014 tax deficiency excluding interest; and a Swedish tax dispute involving approximately $41.0 million of potential additional tax expense. The company has not accrued liabilities for the IRS or Swedish tax matters and cannot predict the outcomes.
Other unusual items included a $5.3 million impairment of product tradenames and trademarks, $14.2 million of restructuring costs, a $17.4 million cash receipt from early termination of a net-investment hedge, and a Treasury Rate Lock hedging a planned $150 million debt issuance in 2021.
Important Facts for Investors to Verify
- Reconcile reported EPS of $0.17 with adjusted EPS of $0.49 and assess the recurring nature of excluded amortization, restructuring, impairment, and other items.
- Monitor execution of the restructuring plan, including workforce reductions, one-time charges, cost savings, and targeted margin expansion.
- Assess the sustainability of Technologies & Equipment growth and the decline in Consumables sales and profitability.
- Review cash conversion, inventory and receivable days, planned capital expenditures, and the decline in cash balances.
- Evaluate debt maturities, refinancing plans, interest-rate exposure, and available liquidity.
- Track the SEC investigation, merger-related litigation, IRS dispute, and Swedish tax appeal for potential financial or governance consequences.
- Consider the impact of foreign-currency movements, distributor inventory changes, discontinued products, and biennial trade-show timing on reported results.