DENTSPLY International Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual Form 10-K, not a standalone quarterly filing; fourth-quarter information is included in the unaudited quarterly data. The registrant was DENTSPLY International Inc., now associated with DENTSPLY Sirona.
Business Context
DENTSPLY designed, manufactured and distributed professional dental consumables, laboratory products, specialty products and consumable medical devices in more than 120 countries. Dental products represented approximately 88% of consolidated net sales excluding precious metal content. International markets accounted for approximately 67% of sales excluding precious metal content.
The company operated through four reportable segments. The Implants/Endodontics/Healthcare/Pacific Rim segment benefited substantially from the full-year inclusion of Astra Tech, acquired on August 31, 2011.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $2.928 billion | $2.538 billion | +15.4% |
| Net sales excluding precious metal content | $2.715 billion | $2.333 billion | +16.4% |
| Gross profit | $1.556 billion | $1.273 billion | +22.2% |
| Gross margin excluding precious metal content | 57.3% | 54.6% | +2.7 percentage points |
| Operating income | $381.9 million | $300.7 million | +27.0% |
| Net income attributable to DENTSPLY | $314.2 million | $244.5 million | +28.5% |
| Diluted EPS | $2.18 | $1.70 | +$0.48 |
| Cash flow from operating activities | $369.7 million | $393.5 million | -$23.8 million |
| Capital expenditures | $92.1 million | $71.2 million | +$20.9 million |
| Effective tax rate | 2.7% | 4.3% | Lower |
The 2012 gross margin benefited from pricing, product mix and acquisition effects, partly offset by higher manufacturing costs. SG&A increased to $1.149 billion, or 42.3% of sales excluding precious metal content, from 40.2%, primarily because of Astra Tech-related costs, $30.9 million of amortization and global marketing activity.
Year-end cash and cash equivalents were $80.1 million, compared with $77.1 million in 2011. Total debt was $1.521 billion, down from $1.767 billion, and net debt to total capitalization improved to 39.0% from 47.3%. The company had $527.4 million of unused credit lines, including its $500 million revolving credit facility. Inventory days increased to 106 from 100, while receivable days improved to 53 from 54.
Material Changes Versus 2011
- Excluding precious metal content, constant-currency sales growth was 20.2%, consisting of 4.0% internal growth and 16.2% acquisition growth. Currency translation reduced reported growth by 3.8%.
- The Implants/Endodontics/Healthcare/Pacific Rim segment increased sales excluding precious metal content by 39.4% and operating income by 33.9%, primarily reflecting the full-year Astra Tech contribution.
- The Orthodontics/Canada/Mexico/Japan segment recovered modestly from the Japan-related supply disruption; sales increased 2.9% and operating income increased 5.1%.
- Dental Consumable and Laboratory sales declined 0.3% on a reported basis, although constant-currency sales increased 2.6%. Select Distribution sales declined 1.3% and the segment recorded a small operating loss.
- Restructuring and other costs declined to $25.7 million from $35.9 million. 2012 included $17.8 million of restructuring costs and $5.2 million of impairment charges for previously acquired technology.
- Operating cash flow declined despite higher net income because of working-capital usage, particularly increased inventory and lower accrued liabilities.
- The company repaid $221.8 million of commercial paper and reduced total debt by $245.7 million. It repurchased approximately 1.0 million shares for $38.8 million.
Guidance, Outlook and Management Commentary
- Management identified a long-term internal growth target of 3% to 6%, subject to economic conditions.
- The company expected ongoing cash requirements, including capital expenditures of approximately $120 million to $130 million, debt service, dividends, stock repurchases and potential acquisitions, to be funded through operating cash flow, existing cash and available credit facilities.
- Management stated that near-term emphasis would be placed on integrating recent acquisitions and reducing associated debt, although acquisitions remain part of the long-term growth strategy.
- Management estimated annual restructuring savings of $10 million to $15 million over three to five years, but cautioned that the savings may not be fully achieved.
- No impairment was identified in the 2012 annual goodwill test. However, the Healthcare reporting unit, created through Astra Tech, had fair value approximately equal to book value and remains sensitive to changes in discount rates, growth, margins and cash-flow forecasts.
Risks, Contingencies and Unusual Items
- The 2.7% effective tax rate was unusually low and reflected a $57.7 million benefit from anticipated tax losses, a $12.0 million benefit from foreign tax-rate changes and other tax adjustments. The rate is not necessarily indicative of future periods.
- The company had significant acquisition-related leverage, including $250.9 million of borrowings due in 2013, and was subject to debt covenants and cross-default provisions. Management reported compliance with all covenants at December 31, 2012.
- The company received subpoenas from the U.S. Attorney’s Office and OFAC concerning export controls and economic sanctions, and voluntarily contacted OFAC and BIS regarding additional matters. The outcome and potential financial impact were not determinable.
- Class-action litigation concerning Cavitron ultrasonic scalers remained pending. The company did not believe a loss was probable and could not estimate a reasonable range of possible loss, but an unfavorable resolution could materially affect results.
- The company held $129.8 million of precious metals on consignment. Loss of consignment facilities could require financing of inventory and increase liquidity and earnings volatility.
- Key risks included foreign-exchange exposure, economic and reimbursement changes, regulatory approvals, product liability and recalls, supplier concentration, competition, cybersecurity and technology disruption, goodwill impairment, tax changes and acquisition integration.
- The company had an obligation to purchase the remaining shares of a VIE during the first quarter of 2014; the expected price was approximately €62.6 million, subject to adjustment.
- The 2012 financial statements and internal controls received unqualified opinions from PricewaterhouseCoopers LLP.
Important Facts for Investors to Verify
- Whether reported growth can continue after the significant comparison benefit from the full-year Astra Tech contribution.
- Progress in reducing debt and refinancing or repaying the $250.9 million of borrowings due in 2013.
- Inventory normalization following orthodontic supply replenishment and its effect on working capital and cash conversion.
- The sustainability of the unusually low effective tax rate and realization of deferred tax assets, against a $179.7 million valuation allowance.
- Developments in the export-control and sanctions inquiries and any related penalties or remediation costs.
- Outcomes of the Cavitron litigation and other product-liability, regulatory and intellectual-property matters.
- Performance and impairment sensitivity of the Astra Tech-related Healthcare reporting unit, including its substantial goodwill and intangible assets.
- Whether management achieves the projected $10 million to $15 million of annual restructuring savings and its $120 million to $130 million capital-expenditure expectation.