DENTSPLY SIRONA Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global dental products and technology company operating through Technologies & Equipment and Consumables segments. The filing covers the unaudited three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017. Approximately 92% of sales came from professional dental products.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $956.1 million | $900.5 million | 6.2% increase |
| Net sales excluding precious metals | $945.8 million | $889.4 million | 6.3% increase |
| Gross profit | $514.1 million | $492.0 million | 4.5% increase |
| Gross margin | 53.8% | 54.6% | 80 basis-point decrease |
| Operating income | $68.7 million | $84.2 million | 18.4% decrease |
| Operating margin | 7.2% | 9.4% | Approximately 220 basis-point decrease |
| Net income attributable to DENTSPLY SIRONA | $81.2 million | $59.8 million | 35.8% increase |
| Diluted EPS | $0.35 | $0.26 | Increase of $0.09 |
| Adjusted diluted EPS | $0.45 | $0.49 | Decrease of $0.04 |
| Cash flow from operations | $55.1 million | $82.5 million | Decrease of $27.4 million |
Reported sales growth was principally supported by foreign currency translation. Constant-currency sales excluding precious metal content declined 1.1%, including a 1.4% decline in internal sales growth. Gross margin excluding precious metal content declined to 54.4% from 55.3%, primarily because of unfavorable product mix and currency effects.
- Technologies & Equipment sales excluding precious metal content increased 6.4% to $498.0 million; segment adjusted operating income increased 38.5% to $74.8 million.
- Consumables sales increased 6.2% to $447.8 million; segment adjusted operating income declined 7.7% to $107.1 million.
- United States sales excluding precious metal content declined 6.9% on a reported basis and 7.4% on a constant-currency basis. Europe increased 14.6% reported and 0.6% constant currency; Rest of World increased 11.6% reported and 5.3% constant currency.
- SG&A increased 7.5% to $435.2 million, and restructuring and other costs increased to $10.2 million from $3.1 million.
- Other income included a $44.1 million gain on the sale of the Company’s DIO equity investment. This materially increased reported net income but was excluded from adjusted results.
Liquidity, debt and capital resources
- Cash and cash equivalents were $317.1 million at March 31, 2018, compared with $320.6 million at December 31, 2017.
- Total debt, including current maturities, was approximately $1.67 billion on the balance sheet; estimated fair value was $1.66 billion. Long-term debt was $1.65 billion.
- Total net debt to total capitalization was 16.8%, compared with 16.6% at year-end 2017.
- Operating cash flow was $55.1 million; investing cash outflow was $45.2 million, including $35.8 million of capital expenditures; financing cash outflow was $19.4 million.
- The Company had $500.0 million available under its revolving credit and commercial paper arrangements in the aggregate, no borrowings under the current revolving credit facility, and $13.5 million outstanding under uncommitted short-term lines. Total unused credit lines were $536.6 million.
- Management expects 2018 capital expenditures of approximately $130 million to $140 million. The quarterly dividend declared was $0.0875 per share.
Material changes, outlook and unusual items
- Distributor inventory changes related to revised Patterson and Henry Schein equipment distribution arrangements favorably affected first-quarter sales by approximately $4 million. Management expects these inventory changes to reduce 2018 sales by approximately $65 million to $75 million year over year, including an estimated $35 million to $40 million reduction during the balance of 2018.
- Management continues a global cost-reduction program targeted at approximately $100 million over several years. Additional restructuring charges may be material, and the Company states that achievement of the target is not assured.
- On May 1, 2018, after quarter-end, the Company acquired OraMetrix for $90.0 million, with up to $60.0 million of additional earn-out payments. OraMetrix provides orthodontic treatment-planning software, wire bending and clear-aligner manufacturing.
- The Company adopted ASC 606 using the modified retrospective method. The adoption reduced opening retained earnings by $6.0 million and increased reported Q1 2018 sales by $2.1 million versus the amount that would have been reported under the prior standard, while reducing net income attributable to DENTSPLY SIRONA by $0.3 million.
- The Company also adopted accounting guidance concerning intra-entity asset transfers, pension-cost presentation and tax effects in accumulated other comprehensive income. It early adopted ASU 2018-02 and reclassified $7.6 million from accumulated other comprehensive income to retained earnings.
- Tax accounting for the Tax Cuts and Jobs Act remained provisional. The Company recorded a $3.4 million tax benefit related to tax reform and estimated a cash liability of approximately $1.0 million for the deemed repatriation of foreign earnings, subject to further analysis and potential adjustment.
- The SEC Division of Enforcement requested documents and information concerning the Company’s accounting and disclosures. The Company is cooperating but cannot predict the outcome or whether the matter could materially affect its financial condition, results or cash flows.
- Roth Licensing received an arbitration award of approximately $16.0 million against a Company subsidiary relating to trademark infringement. The Company filed a motion to vacate the award.
- At March 31, 2018, management identified no new goodwill or indefinite-lived intangible impairment-triggering events, but future declines in markets, cash flows, valuation multiples or increases in discount rates could result in impairment charges.
Most important facts for investors to verify
- Whether reported sales growth persists after the favorable foreign-exchange effect and distributor inventory benefits unwind.
- The magnitude and timing of the expected $65 million to $75 million unfavorable distributor-inventory impact on 2018 sales.
- Whether Technologies & Equipment segment improvement can offset weakness in Consumables and the United States.
- The sustainability of earnings excluding the $44.1 million DIO investment gain and other non-GAAP adjustments.
- Progress toward the approximately $100 million cost-reduction target, including future restructuring charges and execution risks.
- Final accounting for the Tax Cuts and Jobs Act and any resulting changes to tax liabilities or effective tax rates.
- The outcome and potential financial exposure from the SEC inquiry, Roth Licensing arbitration and other litigation.
- Future goodwill and intangible-asset impairment testing, particularly for the Technologies & Equipment reporting units.