DENTSPLY SIRONA Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global manufacturer of professional dental technology, equipment, consumables and certain healthcare products. The company reports two segments: Technologies & Equipment and Consumables. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $894.8M | $962.1M | $2,259.7M | $2,917.7M |
| Gross profit | $442.3M | $514.0M | $1,086.2M | $1,554.5M |
| Gross margin | 49.4% | 53.4% | 48.1% | 53.3% |
| Operating income (loss) | $81.7M | $109.5M | $(147.4)M | $224.3M |
| Net income (loss) attributable to Dentsply Sirona | $53.8M | $85.0M | $(181.5)M | $160.6M |
| Diluted EPS | $0.25 | $0.38 | $(0.83) | $0.71 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $371.5M | $333.5M |
Q3 operating margin was approximately 9.1%, versus 11.4% in the prior-year quarter; net margin was approximately 6.0%, versus 8.8%. The nine-month operating loss included a $156.6 million goodwill impairment charge and $62.5 million of restructuring and other costs.
- Q3 sales declined 7.0%; organic sales declined 8.8%. Technologies & Equipment sales declined 5.7%, while Consumables declined 8.6%.
- Nine-month sales declined 22.6%; organic sales declined 21.7%. Technologies & Equipment sales declined 17.7%, and Consumables declined 28.6%.
- Q3 adjusted segment operating income was $208.7 million, compared with $218.5 million in Q3 2019. Technologies & Equipment increased to $109.6 million, while Consumables decreased to $99.1 million.
- At September 30, 2020, cash and cash equivalents were $1,272.0 million, compared with $404.9 million at December 31, 2019.
- Total debt, including current maturities, was approximately $2,226.1 million at September 30, 2020, compared with $1,435.4 million at December 31, 2019. Net debt to total capitalization was 16.7%, versus 16.8% at year-end 2019.
- The company had $1,161.1 million available under credit lines and no outstanding borrowings under its credit facilities through the filing date. It remained in compliance with debt covenants.
- Capital expenditures were $60.0 million for the nine months. The company expected critical capital expenditures of approximately $20 million to $40 million for the remainder of 2020.
Material changes versus the prior comparable period
- COVID-19 reduced dental procedures, customer demand and manufacturing utilization, particularly during March and April. Demand improved in May and June and continued improving during Q3, but remained below prior-year levels.
- Gross margin declined 400 basis points in Q3 and 521 basis points for the nine months, primarily because of lower volumes, unfavorable manufacturing variances and inventory write-downs.
- SG&A declined 14.4% in Q3 and 19.6% for the nine months due to cost-containment measures, although SG&A as a percentage of nine-month sales increased to 44.9% from 43.3% because of the sharp sales decline.
- The company issued $750.0 million of senior unsecured notes in May 2020, due June 1, 2030, with a 3.25% semiannual coupon. Proceeds were primarily used to repay a $700.0 million revolver draw.
- The company completed a $140.0 million accelerated share repurchase, receiving 3.7 million shares at an average price of $38.25 including the contractual discount. No repurchases occurred during Q3.
- Cash from operations increased $38.0 million year over year, largely reflecting working-capital improvements, including lower receivables and inventories.
Guidance, outlook, risks and unusual items
- Management expected COVID-19 to continue having a negative material impact on 2020 sales and potentially results beyond 2020. The duration and severity of the pandemic, including renewed restrictions in Europe, remained uncertain.
- The expanded restructuring program targets approximately $250 million of annual cost savings and total charges of approximately $375 million. The company expects most remaining charges from the August 2020 portfolio actions to be recorded in Q4 2020.
- The company announced plans to exit traditional orthodontics and selected laboratory businesses, reduce its workforce by approximately 4% to 5%, and close or exit facilities. The affected businesses generated 2019 sales of approximately $132 million and $44 million, respectively.
- Q3 restructuring expenses related to these actions were approximately $48 million, including approximately $35 million of non-cash charges. Total expected charges were $70 million to $80 million, of which $45 million to $55 million were expected to be non-cash.
- The company recorded $156.6 million of goodwill impairment and $38.7 million of indefinite-lived intangible asset impairment in Q1 2020. Future impairment charges remain possible if demand, forecasts, discount rates or market conditions deteriorate.
- Management believed liquidity was sufficient for the next twelve months and expected covenant compliance, but noted that a prolonged recovery could require covenant waivers. Failure to obtain waivers could result in default and acceleration of debt.
- Material contingencies include an ongoing SEC investigation, securities-related litigation, an IRS dispute involving a proposed $17.1 million 2014 tax deficiency excluding interest, and a Swedish tax matter involving approximately $56 million of potential tax expense. No liability was accrued for the IRS or Swedish matters based on management’s assessment.
- On October 22, 2020, after the reporting period, the company paid $45 million for a minority interest in a privately held dental services company.
Important facts for investors to verify
- Whether dental procedure volumes and customer demand recover sufficiently to offset continuing COVID-19 restrictions and practice safety protocols.
- The timing and cash versus non-cash composition of remaining restructuring charges, facility closures and workforce reductions.
- Potential additional goodwill or intangible-asset impairments, particularly for reporting units with fair values close to carrying value.
- Debt covenant headroom, refinancing needs, interest expense and continued availability of revolving facilities.
- Resolution and potential financial exposure from the SEC investigation, IRS dispute, Swedish tax matter and securities litigation.
- Progress toward the stated restructuring targets of approximately $250 million in annual savings and a 22% adjusted operating margin by the end of 2022.