DENTSPLY International Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. The filing is unaudited and was filed October 25, 2012. The company operated as DENTSPLY International Inc.; the source does not identify it as DENTSPLY Sirona.
Business Context
DENTSPLY was a global manufacturer and distributor of dental and healthcare products, serving more than 120 countries. Its principal categories were dental consumables, dental laboratory products, dental specialty products, and consumable medical devices. Professional dental products represented approximately 88% of third-quarter sales and 89% of nine-month sales.
Results reflected the 2011 Astra Tech acquisition, continued integration activity, recovery of the Orthodontics business following supply disruptions in Japan, and unfavorable foreign-currency translation from a strengthening U.S. dollar.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $695.7 million | $619.8 million | $2,175.1 million | $1,799.7 million |
| Sales excluding precious metals | $647.1 million | $563.8 million | $2,011.2 million | $1,654.7 million |
| Gross profit | $364.1 million | $297.6 million | $1,164.3 million | $912.5 million |
| Gross margin, including precious metals | 52.3% | 48.0% | 53.5% | 50.7% |
| Gross margin, excluding precious metals | 56.3% | 52.8% | 57.9% | 55.1% |
| Operating income | $88.7 million | $39.8 million | $284.7 million | $235.4 million |
| Operating margin | 12.7% | 6.4% | 13.1% | 13.1% |
| Net income attributable to DENTSPLY | $53.4 million | $60.6 million | $187.4 million | $203.9 million |
| Diluted EPS | $0.37 | $0.42 | $1.30 | $1.42 |
| Adjusted diluted EPS | $0.51 | $0.46 | $1.65 | $1.52 |
Third-quarter sales excluding precious metal content increased 14.8%, consisting of 15.4% acquisition growth, 4.7% internal growth, and a 5.3% negative currency impact. Nine-month sales excluding precious metal content increased 21.5%, with 22.9% acquisition growth, 3.2% internal growth, and the remaining change primarily reflecting currency effects.
Third-quarter operating income increased 122.8%, helped by higher gross margins, lower restructuring and other costs, and lower net interest and other expense. Reported net income and EPS declined because the prior-year period included a $47.7 million tax benefit from releasing a valuation allowance.
Cash Flow, Debt and Liquidity
- Cash flow from operations was $202.1 million for the first nine months of 2012, down from $254.8 million in the prior-year period.
- Operating cash flow was reduced by working-capital investment, including higher receivables and inventories. Inventory days increased to 111 and receivable days to 60, both including recent acquisitions.
- Capital expenditures were $64.9 million. No acquisition payments were made during the first nine months of 2012, compared with $1.8 billion in the prior-year period for Astra Tech.
- Cash dividends paid were $23.6 million, and $38.8 million was spent repurchasing approximately 1.0 million shares.
- Cash and cash equivalents declined to $56.1 million from $77.1 million at December 31, 2011.
- Total debt was approximately $1.65 billion based on current and long-term debt balances, versus approximately $1.77 billion at year-end 2011. Total debt to capitalization declined to 43.3% from 48.4%.
- The company had $500.0 million of aggregate availability under its commercial paper and five-year revolving credit arrangements, with $151.5 million outstanding under the revolving facility. It also had $74.9 million of uncommitted short-term lines, of which $9.2 million was outstanding. Total unused availability was $414.2 million.
- The $250.0 million 364-day revolving credit agreement expired on August 29, 2012, with no borrowings outstanding. Management stated that liquidity was adequate and that the company was in compliance with its revolving-credit covenants.
Material Changes Versus the Prior Comparable Period
- The Astra Tech acquisition drove significant year-over-year growth, particularly in the Implants/Endodontics/Healthcare/Pacific Rim segment, whose third-quarter sales excluding precious metals increased 34.0% and nine-month sales increased 61.5%.
- Third-quarter gross margin excluding precious metals improved 350 basis points, primarily from pricing, mix, currency effects, and acquired businesses. The nine-month margin improved 280 basis points.
- Third-quarter restructuring and other costs fell to $15.1 million from $26.4 million. Nine-month costs fell to $18.9 million from $33.8 million.
- Interest expense increased on a nine-month basis because of higher debt supporting acquisitions, although third-quarter net interest expense declined by $1.5 million due partly to prior-year financing fees.
- SG&A as a percentage of sales excluding precious metals rose to 42.8% for the first nine months from 38.9%, reflecting the Astra Tech cost structure, acquisition-related amortization, global marketing events, and integration costs.
- The Orthodontics/Canada/Mexico/Japan segment returned to profitability in the third quarter, with segment operating income of $5.3 million versus a $1.4 million loss in the prior-year quarter. Nine-month operating income remained below the prior year.
- Other comprehensive income improved substantially, primarily because of foreign-currency translation gains and unrealized gains on available-for-sale securities. These non-operating changes increased accumulated other comprehensive loss from a $191.0 million deficit at year-end 2011 to a $95.8 million deficit at September 30, 2012.
Outlook, Commentary and Risks
- Management described the third quarter as a record sales quarter and expected continued Astra Tech integration during the remainder of 2012 and much of 2013.
- Management’s long-term internal-growth target was 4% to 6%, but it expected 2012 growth could be below that range because of European economic uncertainty and broader global conditions.
- The Orthodontics recovery was progressing, with allocation restrictions removed. Management expected a slightly positive full-year 2012 earnings impact versus the prior year.
- At then-current exchange rates, the stronger U.S. dollar was expected to continue negatively affecting sales and EPS, although less severely than earlier in the year.
- Restructuring plans involved integration, reorganization, and closure or consolidation of facilities. The September 30, 2012 restructuring accrual was $13.7 million.
- The company discontinued sales to Iran by non-U.S. subsidiaries following an October 9, 2012 executive order and reserved appropriate receivable allowances. The timing of any resumption was uncertain.
- The company disclosed class-action litigation concerning Cavitron ultrasonic scalers. It did not believe a loss was probable and could not estimate a reasonable loss range, but an unfavorable resolution could materially affect results.
- The company was responding to subpoenas and inquiries from the U.S. Attorney’s Office, OFAC, and BIS regarding export controls and economic sanctions. No claims had been made, and the ultimate outcome and potential impact were not predictable.
- Goodwill impairment testing for 2012 resulted in no impairment. However, certain reporting units, including the Healthcare reporting unit acquired through Astra Tech, had limited valuation cushion and could be exposed to future impairment if discount rates rise or market performance deteriorates.
- The company had $136.3 million of precious metals held on consignment. Loss of these arrangements could require third-party financing to fund precious-metal inventory.
Most Important Facts to Verify
- Reconcile reported growth with acquisition growth, internal growth, precious-metal content, and foreign-currency effects.
- Assess whether Astra Tech integration benefits can offset its higher SG&A, amortization, restructuring, and debt-service costs.
- Monitor working-capital trends, particularly the increase in inventory and receivable days and the decline in operating cash flow.
- Review debt maturities, revolving-credit availability, commercial-paper reliance, covenant compliance, and the effects of currency movements on debt.
- Evaluate the sustainability of the improved gross margin and the company’s non-GAAP adjusted EPS reconciliation.
- Track the Cavitron litigation, export-control and sanctions inquiries, and any related reserves or disclosures.
- Consider sensitivity of goodwill, intangible assets, and DIO-related fair-value measurements to operating performance, discount rates, currency rates, and share prices.