DENTSPLY SIRONA Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
DENTSPLY SIRONA is a global dental-products and technologies company, serving primarily the professional dental market. Its two reportable segments are Technologies & Equipment and Consumables. The filing covers the unaudited quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Professional dental products represented approximately 92% of sales. The company adopted ASC 842 lease accounting on January 1, 2019, recognizing $156.7 million of operating lease right-of-use assets and $118.5 million of noncurrent operating lease liabilities at September 30, 2019.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $962.1 million | $928.4 million | $2,917.7 million | $2,926.6 million |
| Sales excluding precious metals | $950.6 million | $920.6 million | $2,886.1 million | $2,899.1 million |
| Gross profit | $514.0 million | $476.1 million | $1,554.5 million | $1,543.0 million |
| Gross margin | 53.4% | 51.3% | 53.3% | 52.7% |
| Operating income (loss) | $109.5 million | $45.5 million | $224.3 million | $(1,039.9) million |
| Operating margin | 11.4% | 4.9% | 7.7% | (35.5)% |
| Net income attributable to DENTSPLY SIRONA | $85.0 million | $28.0 million | $160.6 million | $(1,012.8) million |
| Diluted EPS | $0.38 | $0.13 | $0.71 | $(4.50) |
| Adjusted diluted EPS | $0.57 | $0.38 | $1.71 | $1.43 |
Q3 reported sales increased 3.6%; sales excluding precious metal content increased 3.3%. Constant-currency sales excluding precious metal content increased 5.2%, and internal sales growth was 7.5%. Adjusted operating income was $172.3 million, or 18.1% of sales excluding precious metal content, versus $120.2 million, or 13.0%, in the prior-year quarter.
- Segment performance: Q3 sales excluding precious metal content increased 5.1% in Technologies & Equipment to $534.5 million and 1.0% in Consumables to $416.1 million. Segment adjusted operating income increased 117.7% and 11.2%, respectively.
- Cash flow: Nine-month operating cash flow was $333.5 million, compared with $297.6 million in 2018. Capital expenditures were $86.9 million; full-year 2019 capital expenditures were expected at approximately $120 million to $130 million.
- Liquidity: Cash and cash equivalents were $226.1 million at September 30, 2019, down from $309.6 million at December 31, 2018. The company reported $716.8 million of available lines of credit and no borrowings under its $700 million revolving facility or commercial paper facility.
- Debt: Current notes payable and current debt were $11.7 million and long-term debt was $1,403.9 million. Total net debt to total capitalization was 19.0%, versus 20.8% at December 31, 2018. The company was in compliance with its debt covenants.
- Capital allocation: The company repurchased 3.0 million shares for $160.0 million during the first nine months and paid $58.7 million of dividends. $589.8 million remained available under the repurchase authorization at September 30, 2019.
Material changes versus the prior comparable period
- Profitability improved materially, primarily because 2018 included a $1,085.8 million goodwill impairment charge and $179.2 million of indefinite-lived intangible impairment charges. No goodwill impairment was recorded in 2019.
- Q3 gross margin improved by 210 basis points, while gross margin excluding precious metal content improved by 240 basis points, driven primarily by cost savings and divestitures of lower-margin businesses.
- Q3 SG&A declined 4.6% to $399.3 million, and SG&A as a percentage of sales excluding precious metal content declined to 42.0% from 45.5%.
- Nine-month restructuring and other costs declined to $68.1 million from $211.2 million. However, 2019 included $32.8 million of fixed-asset impairments, $5.3 million of indefinite-lived intangible impairments, and $3.8 million of impairments related to discontinued product lines.
- Technologies & Equipment showed stronger growth, led by Digital Dentistry and Healthcare, while Consumables declined 4.1% for the nine months excluding precious metal content, primarily due to weakness in Laboratory and Preventive businesses.
- Foreign exchange remained a significant headwind: the stronger U.S. dollar reduced Q3 sales excluding precious metal content by approximately 2.3% and nine-month sales by approximately 3.8%.
- Net debt declined during the period, including repayment of the $131.3 million PNC Term Loan and repayment of $67.8 million of commercial paper outstanding at year-end 2018. The company issued 12.5 billion Japanese yen of 12-year private placement notes at a 0.99% coupon to refinance maturing yen debt.
Guidance, outlook, commentary and risks
Management’s restructuring program targets annualized topline growth of 3% to 4%, an adjusted operating margin of 20% by the end of 2020, 22% by 2022, and $200 million to $225 million of annual net cost savings by 2021. The program anticipates a 6% to 8% reduction in the global workforce and approximately $275 million of one-time expenditures and charges. Through September 30, 2019, approximately $150 million of related expenses and charges had been recorded, including approximately $72 million of non-cash charges. Management stated that the company remained on track with its headcount objectives but cautioned that the expected savings and results are not assured.
Management cited new CAD/CAM and orthodontic products, Digital Dentistry, Healthcare, cost savings, pricing, and improved operating efficiency as positive factors. Competitive pressure in imaging equipment, discontinued products, divestitures, foreign exchange, distributor inventory fluctuations, and higher incentive compensation remained offsets.
- The SEC Division of Enforcement requested documents and information concerning the company’s accounting and disclosures. The company is cooperating and cannot predict the outcome or potential impact.
- The IRS proposed disallowing a $546.0 million worthless-stock deduction, which could result in a $17.1 million 2014 tax deficiency, excluding interest. The company has not accrued a liability and believes its position is more likely than not to be sustained, but an adverse resolution could materially affect earnings, liquidity, and financial position.
- The Swedish Tax Agency has challenged certain interest-expense deductions. An adverse outcome could result in approximately $41.0 million of additional tax expense; the company is pursuing appeals.
- Putative securities class actions, a derivative action, employment-related litigation, and other proceedings remain pending or subject to appeal. The company states that it does not currently expect these matters to have a material adverse effect, but unfavorable developments could be material.
- Goodwill and indefinite-lived intangible assets remain sensitive to discount rates, market conditions, forecast cash flows, profitability, and earnings multiples. Future impairment charges remain possible.
- Approximately two-thirds of sales originate outside the United States, creating material foreign-currency exposure. The company uses derivatives to manage foreign exchange and interest-rate risks.
Most important facts for investors to verify
- Whether restructuring actions deliver the targeted 20% adjusted operating margin by 2020 and $200 million to $225 million of annual net savings by 2021.
- The sustainability of Technologies & Equipment growth and whether Consumables sales recover from its nine-month decline.
- The status and potential financial exposure of the SEC inquiry, IRS tax dispute, Swedish tax matter, and securities-related litigation.
- Whether foreign exchange, distributor inventory movements, competitive pressure in imaging equipment, or further product discontinuations affect reported and constant-currency growth.
- The company’s ability to maintain liquidity while funding share repurchases, dividends, restructuring costs, capital expenditures, and debt obligations.
- Future impairment testing assumptions and headroom for goodwill and indefinite-lived intangible assets.