DENTSPLY SIRONA Inc. quarterly report, Q2 FY2012

DENTSPLY International Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2012; filed July 31, 2012. Financial statements are unaudited and prepared under U.S. GAAP. The company operated globally in dental and healthcare products and reported sales in more than 120 countries.

Financial performance

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Net sales	$763.0 million	$609.4 million	$1,479.4 million	$1,179.9 million
Net sales excluding precious metals	$698.5 million	$564.0 million	$1,364.1 million	$1,091.0 million
Gross profit	$407.5 million	$314.9 million	$800.2 million	$614.8 million
Operating income	$108.9 million	$97.0 million	$196.1 million	$195.6 million
Net income attributable to DENTSPLY	$80.8 million	$74.2 million	$134.0 million	$143.3 million
Diluted EPS	$0.56	$0.52	$0.93	$1.00
Operating cash flow	Not separately provided	Not separately provided	$103.4 million	$166.5 million

Q2 sales increased 25.2% on a reported basis and 23.8% excluding precious-metal content. Six-month sales increased 25.4% and 25.0%, respectively.
Q2 gross margin was 53.4% of reported sales and 58.3% excluding precious-metal content, compared with 51.7% and 55.8%, respectively, in the prior-year quarter. Six-month margin excluding precious-metal content was 58.7%, versus 56.4%.
Q2 operating margin was approximately 14.3%; six-month operating margin was approximately 13.3%.
Q2 SG&A increased 40.3% to $296.0 million, reflecting Astra Tech expenses, acquired-intangible amortization, integration costs and global marketing events.
Net interest expense increased $9.5 million in Q2 and $18.4 million in the first six months because of higher acquisition-related debt.
The effective tax rate declined to 15.6% in Q2 from 19.4% and to 17.5% for six months from 22.4%, benefiting from tax-contingency resolutions, repatriation assumptions, acquisition restructuring and earnings mix.

Balance sheet, debt and liquidity

June 30 cash and cash equivalents were $53.2 million, down from $77.1 million at December 31, 2011.
Total debt, including current maturities, was approximately $1.72 billion based on current notes payable and long-term debt balances. Total debt to capitalization was 46.4%, compared with 48.4% at year-end 2011.
The company reported $228.9 million outstanding under its multi-currency revolving facility and $11.7 million under uncommitted short-term lines. It had $583.3 million of unused revolving and short-term credit capacity.
Operating cash flow of $103.4 million was reduced by working-capital investment, including increases in receivables, inventories and prepaid assets. Inventory days increased to 111 days on a constant-currency basis.
Capital expenditures were $42.9 million, and management expected 2012 capital expenditures to exceed 2011 levels.
The company repurchased $38.8 million of stock during the first six months and paid $15.7 million in dividends.

Material changes versus the prior comparable period

The Astra Tech acquisition, completed August 31, 2011, was the principal growth driver. Acquisition growth excluding precious-metal content was 26.4% in Q2 and 26.8% for the first six months.
The Implants/Endodontics/Healthcare/Pacific Rim segment grew reported sales excluding precious metals by 75.9% in Q2 and 80.0% for six months, primarily from acquisitions and internal growth.
Dental Consumable and Laboratory sales excluding precious metals declined 3.4% in Q2 and 0.2% for six months on a reported basis, while Orthodontics/Canada/Mexico/Japan declined 0.5% and 9.5%, respectively.
Internal growth excluding the Japanese market and Orthodontics was 3.9% in Q2 and 4.2% for six months. Reported growth was negatively affected by currency translation, particularly the strengthening U.S. dollar.
Six-month net income attributable to DENTSPLY declined $9.3 million and diluted EPS declined $0.07 despite higher sales, primarily reflecting higher SG&A, amortization, interest expense and acquisition-related costs.
Goodwill declined to $2.04 billion from $2.19 billion, primarily due to finalization adjustments to provisional Astra Tech purchase accounting and foreign-exchange effects. Identifiable intangible assets increased to $947.7 million from $791.1 million.

Guidance, outlook, risks and unusual items

Management targets long-term internal growth of 4% to 6% but stated that 2012 may be below that range because of European economic uncertainty and broader global conditions.
Astra Tech integration was progressing, with U.S. dental-implant integration completed during the quarter and additional European integration expected through 2012 and early 2013.
The Orthodontics recovery plan was improving as supply constraints eased. Management expected positive year-over-year earnings comparisons in the third and fourth quarters of 2012.
Management expected the stronger U.S. dollar to continue negatively affecting sales and EPS through the third and fourth quarters.
Restructuring and other costs were $2.5 million in Q2 and $3.8 million year-to-date, primarily employee severance and facility integration, reorganization or consolidation.
Adjusted diluted EPS was $0.62 in Q2 and $1.14 for six months, compared with $0.56 and $1.06, respectively, on a non-GAAP basis. Adjustments primarily included acquired-intangible amortization, acquisition and integration costs, restructuring, Orthodontic continuity costs and tax-related items.
Foreign-currency translation produced a $178.7 million Q2 loss in other comprehensive income, resulting in total comprehensive loss of $55.8 million despite positive net income.
The company reported no goodwill impairment from its 2012 annual testing, but noted sensitivity to discount rates, market deterioration and cash-flow assumptions, particularly for the Healthcare reporting unit acquired through Astra Tech.
Pending Cavitron ultrasonic scaler class-action litigation was not considered probable of loss, and a reasonable loss range could not be estimated. An unfavorable resolution could materially affect results.
The company had $123.4 million of precious metals held on consignment; loss of these arrangements could require third-party financing for inventory.

Most important facts for investors to verify

Whether Astra Tech integration delivers expected synergies while acquired-intangible amortization, integration costs and leverage remain elevated.
Progress in Orthodontics supply recovery and the expected earnings benefit in the second half of 2012.
Organic growth excluding acquisitions, precious-metal content, currency effects, Japan and Orthodontics.
Working-capital normalization, inventory levels and operating cash-flow conversion.
Debt repayment capacity, interest-rate exposure and compliance with revolving-credit covenants.
Foreign-exchange sensitivity, including the substantial accumulated other comprehensive loss and derivative positions.
Potential outcomes of Cavitron litigation, tax matters, contingent acquisition consideration and goodwill impairment sensitivity.
The filing text does not provide a clear full-year revenue or EPS guidance figure.