DENTSPLY International Inc. — Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and nine months ended September 30, 2013. DENTSPLY was a global manufacturer and distributor of dental and consumable medical-device products, serving customers in more than 120 countries. Approximately 88% of sales were from professional dental products. The filing was prepared under U.S. GAAP on an unaudited interim basis.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $704.0 million | $695.7 million | $2,197.1 million | $2,175.1 million |
| Sales excluding precious-metal content | $669.4 million | $647.1 million | $2,058.0 million | $2,011.2 million |
| Gross profit | $376.4 million | $364.1 million | $1,179.6 million | $1,164.3 million |
| Operating income | $105.0 million | $88.7 million | $321.7 million | $284.7 million |
| Net income attributable to DENTSPLY | $79.9 million | $53.4 million | $238.8 million | $187.4 million |
| Diluted EPS | $0.55 | $0.37 | $1.65 | $1.30 |
| Operating cash flow | Not separately provided | Not separately provided | $258.3 million | $202.1 million |
Sales excluding precious-metal content increased 3.4% in the quarter and 2.3% year to date. Reported operating margin was 14.9% in Q3 2013 versus 12.7% in Q3 2012; management reported operating margins of 15.7% and 13.7%, respectively, using its stated comparison. Excluding precious-metal content, gross margin was 56.2% in Q3 and 57.3% for the nine months, compared with 56.3% and 57.9% in the prior-year periods.
Management reported non-GAAP adjusted diluted EPS of $0.57 in Q3 2013 versus $0.51 in Q3 2012, and $1.75 for the first nine months versus $1.65 in the prior-year period. These measures exclude items including purchased-intangible amortization, restructuring, acquisition-related costs, fair-value adjustments and certain tax items.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $50.7 million at September 30, 2013, down from $80.1 million at December 31, 2012.
- Total debt was approximately $1.44 billion, consisting of $270.9 million of current debt and $1.16 billion of long-term debt. Estimated fair value of total long-term debt, including current maturities, was $1.40 billion.
- Total net debt to total capitalization was 35.8%, versus 39.0% at year-end 2012.
- Operating cash flow of $258.3 million funded $73.5 million of capital expenditures, $3.9 million of business acquisitions, $72.4 million of treasury-stock purchases and $25.9 million of dividends, while investing and financing activities produced net cash outflows.
- The company expected full-year 2013 capital expenditures of approximately $110 million.
- Available liquidity included a $500 million multi-currency revolving credit facility, commercial-paper capacity backed by that facility, and $76.7 million of uncommitted short-term lines. Total unused credit related to the revolving and uncommitted facilities was $518.9 million at September 30, 2013.
- A $250 million floating-rate note matured in August 2013. DENTSPLY subsequently entered into a $175 million seven-year variable-rate term loan maturing in August 2020, with interest at three-month U.S. dollar LIBOR plus 1.125% and annual principal repayments of $8.8 million for the first six years.
Material Changes Versus the Prior Comparable Period
- Q3 net sales increased 1.2% on a reported basis and 3.4% excluding precious-metal content. Nine-month reported sales increased 1.0%, while sales excluding precious-metal content increased 2.3%.
- Q3 operating income rose 18.5%, and nine-month operating income rose 13.0%, aided by significantly lower restructuring costs: $2.2 million versus $15.1 million in Q3 2012 and $5.1 million versus $18.9 million for the nine months.
- Net income attributable to DENTSPLY increased 50% in Q3 and 27% for the nine months. The effective tax rate declined to 14.0% from 25.0% in Q3 and to 14.1% from 19.9% for the nine months, helped by prior-year tax benefits and other favorable tax items.
- Net interest expense declined by $2.3 million in Q3 and $6.2 million for the nine months, primarily because of lower average debt.
- Operating cash flow increased 28% year over year, although receivable and inventory days increased on a constant-currency basis. Inventory days rose to 118 and receivable days to 64 versus December 31, 2012.
- Segment sales excluding precious-metal content increased in Dental Consumable and Laboratory Businesses, Select Distribution Businesses and Implants/Endodontics/Healthcare/Pacific Rim, but declined in Orthodontics/Canada/Mexico/Japan. The orthodontic comparison was affected by prior-year customer restocking following a supply outage.
Outlook, Commentary, Risks and Unusual Items
- Management’s long-term internal-growth target was 3% to 6%; reported internal growth was 2.7% in Q3 and 2.3% for the first nine months.
- Management expected some customer inventory reduction in Q4 2013 following an October 1 price increase, which could affect fourth-quarter internal growth.
- Management continued to pursue cost reductions, operational efficiencies, product innovation and acquisitions, while indicating that near-term focus would remain on integrating recent acquisitions and reducing debt.
- Restructuring charges are expected periodically as facility-consolidation and efficiency initiatives are implemented. The restructuring accrual was $8.3 million at September 30, 2013.
- Foreign-exchange exposure was material because approximately two-thirds of sales were outside the United States. The company used foreign-exchange, interest-rate, cross-currency and commodity derivatives to manage exposures; derivatives generated substantial changes in accumulated other comprehensive income.
- The annual goodwill impairment test performed in April 2013 identified no impairment. Goodwill was $2.22 billion and identifiable intangible assets were $800.5 million at September 30, 2013.
- Pending litigation included class-action claims concerning Cavitron ultrasonic scalers. The company did not believe a loss was probable and could not estimate a reasonable loss range; an unfavorable resolution could materially affect results.
- The company was cooperating with U.S. authorities regarding inquiries into export-control and economic-sanctions compliance. No claims had been made, but potential fines, penalties or other enforcement actions could materially affect the business.
- The company held $89.8 million of precious metals on consignment. Loss of these arrangements could require third-party financing to fund required inventory.
Investor Verification Checklist
- Reconcile reported operating margins with management’s stated margin figures and confirm the precise non-GAAP definitions.
- Separate recurring operating performance from favorable tax adjustments, restructuring-cost reductions, acquisition-related items, purchased-intangible amortization and derivative fair-value movements.
- Assess working-capital trends, particularly the increase in inventory and receivable days and management’s expectation that inventory may remain elevated through 2015.
- Review debt maturities, variable-rate exposure, covenant compliance and the company’s ability to refinance current debt due in 2014.
- Monitor foreign-exchange and cross-currency derivative exposures, including the $5.7 million of deferred net derivative losses expected to be reclassified to earnings within twelve months.
- Follow the Cavitron litigation and export-control or sanctions inquiries, for which the filing provides no clear quantifiable loss estimate.