DENTSPLY International Inc. Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2009, with unaudited quarterly information for the fourth quarter and full year. DENTSPLY designed, manufactured and distributed dental consumables, laboratory products and specialty products in more than 120 countries. Approximately 97% of 2009 sales, excluding precious-metal content, came from dental products, and approximately 62% came from customers outside the United States.
The company reported four operating segments: U.S., Germany and certain European consumables; France, U.K., Italy, CIS, Middle East, Africa and Pacific Rim businesses; Canada, Latin America, endodontics and orthodontics; and dental laboratory, implants and non-dental businesses.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $2,159.9 million | $2,193.7 million | (1.5%) |
| Net sales excluding precious-metal content | $1,991.2 million | $1,993.8 million | (0.1%) |
| Gross profit | $1,111.3 million | $1,151.9 million | (3.5%) |
| Gross margin excluding precious-metal content | 55.8% | 57.8% | (2.0 points) |
| Operating income | $381.2 million | $380.4 million | +$0.8 million |
| Net income attributable to DENTSPLY | $274.3 million | $283.9 million | (3.4%) |
| Diluted EPS | $1.83 | $1.87 | (2.1%) |
| Operating cash flow | $362.5 million | $336.0 million | +$26.5 million |
| Capital expenditures | $56.5 million | $76.4 million | (26.1%) |
| Cash, cash equivalents and short-term investments | $450.4 million | $204.2 million | +$246.1 million |
| Total debt and notes payable | $469.3 million | $449.5 million | +$19.9 million |
Net sales excluding precious-metal content, a non-US GAAP measure used because precious-metal sales are largely pass-through revenue, included 2.3% constant-currency growth and 4.5% acquisition growth, offset by negative 2.2% internal growth and a 2.4% currency-translation impact.
SG&A expense declined 2.2% to $723.2 million, and SG&A as a percentage of sales excluding precious-metal content improved to 36.3% from 37.1%. The effective tax rate increased to 24.5% from 20.2%. Return on average equity was 15.4%, compared with 17.9% in 2008.
At December 31, 2009, total assets were $3.09 billion, equity was $1.91 billion and long-term debt including the current portion was $453.7 million. Long-term debt to total capitalization declined to 19.2% from 20.5%.
Fourth-quarter information
| Metric | Q4 2009 | Q4 2008 |
|---|---|---|
| Net sales | $568.7 million | $508.1 million |
| Net sales excluding precious-metal content | $520.1 million | $467.2 million |
| Gross profit | $284.4 million | $271.0 million |
| Operating income | $103.4 million | $85.3 million |
| Net income attributable to DENTSPLY | $74.8 million | $71.0 million |
| Diluted EPS | $0.50 | $0.47 |
Material changes versus the prior comparable period
- Full-year sales excluding precious-metal content were essentially flat, as acquisition and constant-currency growth offset negative internal growth and unfavorable currency translation.
- Gross margin declined because of unfavorable product and geographic mix, lower manufacturing overhead absorption, foreign-currency movements and the effect of 2008 acquisitions.
- Operating income was broadly stable despite lower gross profit, supported by cost containment, restructuring benefits and lower restructuring charges.
- Net income and diluted EPS declined, primarily reflecting the higher effective tax rate and lower operating performance in certain businesses.
- Operating cash flow improved due largely to working-capital management, including a $60.5 million cash benefit from inventory changes. Inventory days improved to 99 from 103, while receivable days increased to 55 from 54.
- Dental consumables sales increased to $710.6 million from $680.0 million, while dental laboratory sales declined to $500.2 million from $558.3 million. Dental specialty sales increased modestly to $895.4 million from $888.5 million.
- The dental laboratory, implants and non-dental segment was the weakest major segment: sales excluding precious-metal content fell 8.8% and segment operating income fell 25.1%.
- The company repurchased approximately 2.45 million shares for $78.7 million at an average price of $32.09 and increased the declared annual dividend to $0.20 per share from $0.185.
Guidance, outlook, commentary and unusual items
- Management identified a long-term sustainable internal growth rate of 4% to 6%, but expected growth to remain below that range in the near term because of economic conditions.
- Management cited distributor inventory reductions, recessionary pressure, unfavorable sales mix, currency movements and lower demand in laboratory, implant and discretionary specialty products.
- Restructuring plans involving facility closures, consolidations and workforce reductions generated $5.9 million of 2009 costs. Management expected incremental savings in 2010.
- Capital expenditures were expected to be $70 million to $80 million in 2010.
- The company agreed to a $250 million private-placement note at a fixed 4.11% rate, funded February 19, 2010. Proceeds were intended to refinance a $150 million note due March 2010, repay $85.2 million of commercial paper and fund book overdrafts.
- At year-end, the company had $404.9 million of unused credit lines and was in compliance with debt covenants. Its $500 million revolving credit agreement was scheduled to expire in May 2010, creating a refinancing and liquidity item to monitor.
- Goodwill was $1.31 billion at year-end. Annual impairment testing identified no goodwill impairment, but future impairment charges remain sensitive to projected cash flows, discount rates, margins and market conditions.
- Litigation contingencies included antitrust and product-related matters for which the company stated that a reasonable loss range could not be estimated. A separate Guidance Endodontics jury verdict included approximately $4 million of compensatory and $40 million of punitive damages; the company planned to challenge the verdict and did not believe it would materially affect financial position.
- Other risks include foreign-exchange and interest-rate volatility, regulatory compliance, product liability and recalls, dental amalgam restrictions, dependence on selected suppliers, acquisition integration, tax audits, pension obligations and potential covenant breaches.
Important facts for investors to verify
- Reconcile full-year and fourth-quarter sales using both GAAP revenue and the company’s non-GAAP sales measure excluding precious-metal content.
- Assess whether the 2009 gross-margin decline is temporary or reflects lasting product, geographic and manufacturing-mix pressure.
- Review the refinancing completed in February 2010 and the replacement or renewal of the revolving credit facility expiring in May 2010.
- Evaluate liquidity after debt refinancing, share repurchases, dividends, planned capital expenditures and potential acquisitions.
- Monitor litigation outcomes, particularly the Guidance Endodontics verdict and pending dental-product and antitrust matters.
- Review goodwill concentration, impairment sensitivity and the performance of the dental laboratory and implant businesses.
- Assess exposure to foreign currencies, interest rates, commodity prices and the $103.7 million of precious metals held on consignment.
- Confirm the effect of tax contingencies, deferred tax valuation allowances and the 24.5% effective tax rate on future earnings.