DENTSPLY SIRONA Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global dental products and technologies company serving dental professionals through equipment, consumables, orthodontic and implant products, and healthcare consumables. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023. Effective April 1, 2023, the Company reorganized its reporting structure into Connected Technology Solutions, Essential Dental Solutions, Orthodontic and Implant Solutions, and Wellspect Healthcare; prior-period segment data was recast.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $947 million | $947 million | $2,953 million | $2,939 million |
| Gross profit | $495 million | $508 million | $1,564 million | $1,610 million |
| Gross margin | 52.2% | 53.7% | 53.0% | 54.8% |
| Operating loss | $236 million | $1,218 million | $158 million | $1,002 million |
| Net loss attributable to Dentsply Sirona | $266 million | $1,077 million | $199 million | $935 million |
| Diluted loss per share | $1.25 | $5.01 | $0.94 | $4.34 |
Q3 sales were flat year over year, while nine-month sales increased 0.5%. Organic sales declined 0.3% in Q3 but increased 2.4% for the first nine months. The nine-month improvement was driven primarily by price increases, Essential Dental Solutions, and orthodontic aligners.
Q3 gross profit declined $13 million and gross margin decreased 150 basis points, reflecting inflation in material costs, higher warranty costs, inventory obsolescence and product rationalization charges. Nine-month gross margin fell 180 basis points, also affected by foreign currency translation and higher material costs.
Q3 SG&A declined 7.6% to $372 million, while research and development increased 12.2% to $46 million. R&D represented 4.8% of Q3 sales; management expects annual R&D investment to remain at least 4% of sales.
The Company recorded $307 million of goodwill and intangible impairment charges in Q3 and the first nine months, compared with $1.281 billion in the comparable 2022 periods. The 2023 charge included a $291 million full write-off of Connected Technology Solutions goodwill and $16 million of indefinite-lived intangible impairments.
Segment adjusted operating income was $194 million in Q3, unchanged from the prior year, and $613 million for the nine months, down from $676 million. Q3 results by segment were Connected Technology Solutions $22 million, Essential Dental Solutions $115 million, Orthodontic and Implant Solutions $31 million, and Wellspect Healthcare $26 million.
Cash flow, debt and liquidity
- Operating cash flow was $217 million for the first nine months, down from $375 million, primarily due to working-capital timing, lower collections, and higher operating expenses.
- Capital expenditures were $109 million; management expects full-year 2023 capital expenditures of approximately $140 million to $160 million.
- Cash used in financing activities was $179 million, including $150 million for treasury stock and $86 million of dividends paid.
- Cash and cash equivalents declined to $309 million at September 30, 2023, from $365 million at December 31, 2022.
- Total debt was $1.990 billion, consisting of $187 million of current debt and $1.803 billion of long-term debt. Net debt was $1.681 billion, and net debt to total capitalization increased to 33.3% from 29.3% at year-end.
- The Company had $562 million of remaining borrowing capacity under credit lines, including a $700 million revolving facility expiring in 2028. Commercial paper borrowings were $165 million, and short-term debt carried a weighted-average interest rate of 5.5%.
- The Company was in compliance with its debt covenants and stated that available cash, operating cash flow, and borrowing capacity should fund operating needs, capital expenditures, and debt service for the next twelve months.
Material changes versus the prior comparable period
- Sales were flat in Q3 and modestly higher for the nine months, but profitability remained pressured by cost inflation, adverse product mix, warranty costs, inventory obsolescence, and foreign-exchange effects.
- Connected Technology Solutions sales declined 3.8% in Q3 and 2.9% for the nine months, primarily due to weaker equipment demand, particularly in Europe.
- Orthodontic and Implant Solutions sales increased 2.2% in Q3 and 1.3% for the nine months, supported by aligners and selected implant markets, but segment adjusted operating income declined.
- Wellspect Healthcare sales increased 9.9% in Q3 and 2.3% for the nine months, with improved adjusted operating income.
- The Company completed a $150 million accelerated share repurchase, receiving approximately 3.9 million shares. No repurchases occurred during Q3; $590 million remained authorized at September 30, 2023.
- Restructuring and other costs were $70 million for the first nine months versus $13 million in the prior-year period. The Company expects total one-time restructuring and related costs of $115 million to $135 million.
Guidance, outlook, commentary and risks
The February 2023 restructuring plan targets an 8% to 10% reduction in the global workforce, approximately $200 million to $225 million of annual cost savings, and substantial completion by mid-2024. The Company expects most remaining restructuring costs to be cash expenditures in 2023, although actual costs and timing may differ.
Management cited higher interest rates, recessionary pressure, weaker European demand, inflation, supply-chain disruption, and lower financing availability for equipment purchases as continuing headwinds. The Company is pursuing procurement, cost containment, pricing, manufacturing improvements, and targeted commercial investments.
Goodwill and intangible asset valuations remain sensitive to discount rates, revenue growth, operating margins, and cash-flow forecasts. The Implants & Prosthetics reporting unit had approximately $1.133 billion of goodwill and would have less than a 10% fair-value cushion under a hypothetical 100-basis-point discount-rate increase. Further deterioration could produce additional impairment charges.
Operations in Israel remained open, but the October 2023 conflict could disrupt production, personnel availability, supply chains, and sales. Products manufactured at Israeli facilities represented approximately 3% of consolidated Q3 sales and 18% of Orthodontic and Implant Solutions sales; related Israeli net assets were $193 million.
Russia and Ukraine represented approximately 2% of Q3 consolidated sales, with $57 million of net assets, including $34 million of cash in Russia that may be difficult or costly to repatriate. The Company also faces ongoing securities litigation, derivative litigation, an SEC investigation, and an IRS dispute involving a proposed adjustment related to a 2016 internal reorganization. The Company cannot currently estimate potential losses for the principal litigation matters.
Management concluded that disclosure controls and procedures were not effective as of September 30, 2023. Four material weaknesses remained unremediated, involving tone at the top, accounting personnel and expertise, customer incentive arrangements and variable consideration, and segregation of duties over manual journal entries. Remediation activities are underway but require additional operating history and testing.
Most important facts for investors to verify
- Whether demand and margins in Connected Technology Solutions, particularly in Europe, stabilize or deteriorate further.
- Progress against the restructuring plan, including the timing of the remaining $45 million to $65 million of estimated charges and realization of targeted cost savings.
- Potential additional goodwill or intangible impairment, especially for Implants & Prosthetics and other assets with limited valuation cushions.
- Operating cash-flow conversion, working-capital trends, debt balances, interest costs, and compliance with debt covenants.
- Remediation and independent testing of the four material weaknesses, particularly controls over customer incentives and revenue recognition.
- Developments in the SEC investigation, securities and derivative litigation, and IRS tax dispute, including any estimate of potential financial exposure.
- Operational effects from the Israel conflict and restrictions on repatriating cash held in Russia.