DENTSPLY SIRONA Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2017. DENTSPLY SIRONA is a global dental products and technologies company operating through Dental and Healthcare Consumables and Technologies segments. The February 2016 merger with Sirona makes year-over-year comparisons difficult because Q1 2017 includes two additional months of Sirona results versus Q1 2016.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $900.5 million | $772.6 million | 16.6% increase |
| Net sales excluding precious metals | $889.4 million | $754.5 million | 17.9% increase |
| Gross profit | $492.0 million | $418.9 million | 17.5% increase |
| Gross margin | 54.6% | 54.2% | 40 basis-point increase |
| Operating income | $84.2 million | $72.7 million | 15.9% increase |
| Operating margin | 9.4% | 9.4% | Approximately flat |
| Net income attributable to DENTSPLY SIRONA | $59.8 million | $125.0 million | 52.2% decrease |
| Diluted EPS | $0.26 | $0.70 | Decrease |
| Adjusted diluted EPS | $0.49 | $0.69 | Decrease |
| Cash flow from operations | $82.5 million | $0.7 million | $81.8 million increase |
Adjusted operating income was $147.9 million, or 16.6% of sales excluding precious metal content, compared with $169.5 million, or 22.2%, in Q1 2016. Adjusted net income was $113.7 million versus $122.4 million.
- Dental and Healthcare Consumables sales excluding precious metal content increased 6.2% to $500.2 million; segment adjusted operating income increased 4.4% to $136.5 million.
- Technologies sales excluding precious metal content increased 37.2% to $389.2 million; segment adjusted operating income increased 0.4% to $54.0 million.
- Cash and cash equivalents were $363.3 million at March 31, 2017, down from $383.9 million at year-end 2016.
- Total debt was approximately $1.55 billion, including $22.7 million of current debt and $1.53 billion of long-term debt. Net debt to total capitalization was 12.7%, compared with 12.4% at December 31, 2016.
- The company had no borrowings under its $500.0 million revolving credit facility and reported $541.0 million of available borrowing capacity under credit lines.
- Capital expenditures were $31.1 million. Management expects full-year 2017 capital expenditures of approximately $120 million to $140 million.
Material changes versus the prior comparable period
- Reported sales benefited substantially from consolidating two additional months of Sirona revenue. On a combined-business, constant-currency basis, sales declined 2.2%, with negative internal growth of 4.7%.
- Distributor equipment inventory changes reduced the comparison by approximately $40 million. Patterson inventory changes alone negatively affected Q1 2017 sales by approximately $35 million.
- Management expects Patterson to reduce equipment inventory by an additional $50 million to $60 million during Q2 and Q3 2017. North American distributor inventory changes are expected to reduce sales by approximately $10 million to $20 million for the remainder of 2017.
- Q1 2017 net income was affected by a $16.9 million tax provision, compared with a $57.9 million tax benefit in Q1 2016. The prior-year benefit included an approximately $76.1 million release of a valuation allowance related to the merger.
- Q1 2017 diluted EPS also reflected substantially higher average diluted shares outstanding, 234.0 million versus 178.4 million, primarily due to the all-stock merger.
- Foreign exchange reduced sales excluding precious metal content by approximately 1.6% and diluted EPS by approximately $0.03 year over year.
- The company repurchased 1.4 million shares for $84.6 million and paid $18.0 million in dividends. The quarterly dividend was increased 12.9% year over year.
Guidance, outlook, risks and unusual items
- Management did not provide a clear full-year revenue or EPS guidance figure in the filing. It disclosed the capital expenditure outlook and expected distributor-inventory effects described above.
- Restructuring and integration initiatives, including proposed German manufacturing, logistics and distribution changes, are estimated to cost approximately $89 million over the next two years, primarily for severance.
- Q1 restructuring and other costs were $3.1 million; restructuring accruals totaled $29.2 million at March 31, 2017.
- Goodwill was $5.96 billion and identifiable intangible assets were $2.96 billion. The company reported no goodwill impairment from its Q1 review, but warned that slower sales growth, higher discount rates, weaker earnings multiples or lower cash-flow projections could result in future impairment.
- Pending litigation includes product-related class actions and a False Claims Act matter on appeal. The company does not believe a loss is probable and cannot estimate a reasonable possible loss range; unfavorable resolutions could materially affect results or liquidity.
- Discussions with OFAC concerning export-control and economic-sanctions compliance remained ongoing. The company could not predict the outcome or potential impact.
- The company is exposed to foreign exchange, interest-rate and commodity-price risk and uses derivatives to manage these exposures. It also held approximately $278.5 million of cash outside the United States, which could incur U.S. tax upon repatriation under then-current law.
- The company adopted accounting updates for inventory measurement, deferred-tax classification, stock compensation and goodwill impairment during the quarter. The filing states that these adoptions did not materially affect reported results, except for a $6.3 million excess tax benefit from stock compensation and a $1.0 million equity reclassification.
Important facts for investors to verify
- Whether reported sales and earnings normalize after Patterson and other distributors complete planned equipment inventory reductions.
- Underlying constant-currency and internal growth, particularly the Technologies segment’s negative internal growth of 12.7%.
- The sustainability of adjusted margins after excluding merger-related costs, restructuring, purchased-intangible amortization and other adjustments.
- The effect of the $89 million restructuring program on future cash flow, operating margins and execution risk.
- Potential goodwill or indefinite-lived-asset impairment, given the large post-merger asset balances and sensitivity to operating assumptions.
- Outcomes of the OFAC and export-control inquiries, pending litigation and other contingencies.
- Future cash deployment among share repurchases, dividends, acquisitions, capital expenditures and debt reduction.