DENTSPLY SIRONA Inc. quarterly report, Q1 FY2021

DENTSPLY SIRONA Inc. — Q1 2021 Form 10-Q Summary

Business context and reporting period

DENTSPLY SIRONA is a global dental products and technology company operating through Technologies & Equipment and Consumables segments. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reported 218.3 million common shares outstanding at May 3, 2021.

Financial performance and key metrics

Metric	Q1 2021	Q1 2020	Change
Net sales	$1,027 million	$874 million	17.5% increase
Gross profit	$579 million	$468 million	23.7% increase
Gross margin	56.4%	53.5%	290 basis-point increase
Operating income (loss)	$154 million	$(125) million	Improved by $279 million
Net income (loss attributable to Dentsply Sirona)	$117 million	$(140) million	Improved by $257 million
Diluted EPS	$0.53	$(0.63)	Improved by $1.16
Cash flow from operations	$49 million	$(10) million	Improved by $59 million

Operating margin was approximately 15.0% in Q1 2021 versus negative 14.3% in Q1 2020. Net margin was approximately 11.4% versus negative 16.0%. The effective tax rate was 21.5% in Q1 2021 compared with negative 7.7% in the prior-year quarter.

Technologies & Equipment sales were $597 million, up 14.8%; segment adjusted operating income was $126 million, up 13.5%.
Consumables sales were $430 million, up 21.5%; segment adjusted operating income was $150 million, up 141.9%.
Total segment adjusted operating income was $276 million, compared with $173 million in Q1 2020.
Reported organic sales increased 12.1%. Sales benefited approximately 5.3% from foreign currency translation and 5.1% from acquisitions, offset by approximately 5.0% from divestitures and discontinued products.
Cash and cash equivalents were $318 million at March 31, 2021, down from $438 million at December 31, 2020.
Total debt, based on the balance sheet, was $2,251 million, consisting of $328 million of current debt and $1,923 million of long-term debt. Estimated fair value of total debt was $2,382 million.
Net debt to total capitalization was 28.2% at March 31, 2021, compared with 27.0% at December 31, 2020.
The company had $1,139 million of borrowing capacity under credit lines and was in compliance with its debt covenants.

Cash flow, capital allocation, and liquidity

Operating cash flow of $49 million was more than offset by $103 million of investing cash outflows and $53 million of financing cash outflows, producing a $120 million decrease in cash. Investing outflows included $92 million for acquisitions and $30 million of capital expenditures, partly offset by $19 million from the sale of a non-strategic business. Financing outflows included $90 million of share repurchases and $22 million of dividends, partly offset by $33 million from stock option exercises and $30 million of short-term borrowings.

Management expects 2021 critical capital expenditures of approximately $150 million to $170 million. The company repurchased approximately 1.5 million shares for $90 million during the quarter, leaving $260 million under the repurchase authorization. Management stated that sufficient liquidity is available for the next twelve months.

Material changes versus the prior comparable period

Results benefited from recovery in dental demand and patient traffic following the initial COVID-19 disruption in March 2020. Most markets experienced improving demand and more normalized operations.
Gross margin expanded by 290 basis points because of favorable product mix and higher volumes of higher-margin products.
SG&A increased 7.2% in dollars but declined to 37.5% of sales from 41.1%, reflecting higher sales absorption and expense discipline.
Q1 2020 included a $157 million goodwill impairment and approximately $39 million of indefinite-lived intangible asset impairment; no such impairment charges were recorded in Q1 2021.
Restructuring and other costs declined to $3 million from $43 million. The company expects most remaining restructuring charges associated with its portfolio and facility actions to be recorded in Q2 2021.
Interest expense increased to $14 million from $7 million because of higher average debt levels, while other income included a $13 million gain from the sale of an investment casting business.
On January 21, 2021, the company acquired Datum Dental for preliminary consideration of $103 million, including a $9 million estimated earn-out. The acquisition added $33 million of goodwill and $81 million of intangible assets.
Inventory increased to $500 million from $466 million at year-end, and inventory days increased to 113 from 102 on a constant-currency basis. Receivable days increased to 56 from 54.

Guidance, outlook, commentary, risks, and unusual items

The restructuring program targets annualized net sales growth of 3% to 4%, adjusted operating margins of 22% by the end of 2022, and annual cost savings of approximately $250 million under the expanded plan. Total program charges are expected to be approximately $375 million.
The company expects most of the remaining $60 million to $70 million of charges related to exiting traditional orthodontics and restructuring portions of the laboratory business to be recorded in Q2 2021. Approximately $57 million had been recorded for these actions through March 31, 2021.
COVID-19 restrictions and the timing of a full return to pre-pandemic demand remain uncertain, although management reported no material production or financial impact from facility infection incidents during the quarter.
Goodwill and indefinite-lived intangible assets remain sensitive to discount rates, market conditions, forecast sales, and other valuation assumptions. Management identified particular sensitivity in the Implants and Equipment & Instruments reporting units but concluded that no impairment-triggering events had occurred as of March 31, 2021.
The company faces an IRS dispute involving a $546 million worthless-stock deduction. The IRS position could result in a material adverse effect on earnings, financial position, and liquidity if resolved unfavorably; no related liability has been accrued.
The Swedish Tax Agency dispute over interest deductions could result in approximately $57 million of additional tax expense if the company is unsuccessful.
Pending securities litigation and derivative-related matters remain disclosed, although management does not currently expect the matters to have a material adverse effect. A related state securities class action was dismissed with prejudice and was not appealed.
Foreign currency movements remain a significant exposure. Other comprehensive loss was $90 million in Q1 2021, primarily reflecting foreign currency translation losses.

Important facts for investors to verify

Whether post-pandemic demand recovery and the reported 12.1% organic sales growth are sustained after the favorable comparison with March 2020.
Progress toward the restructuring program’s approximately $250 million annual cost-savings target and the timing and amount of remaining Q2 charges.
Consumables’ unusually strong adjusted operating income growth and whether favorable product mix persists.
Cash conversion, inventory growth, and the effect of acquisitions and share repurchases on liquidity and leverage.
Final purchase accounting for Datum Dental and the remaining working-capital adjustment related to the Byte acquisition.
Future impairment testing for goodwill and intangible assets, particularly the sensitive Implants and Equipment & Instruments reporting units.
Resolution and potential financial exposure from the IRS worthless-stock deduction dispute and the Swedish interest-deduction dispute.
Expiration or renewal of the short-term revolving facilities that matured during Q2 2021 and continued compliance with debt covenants.