DENTSPLY SIRONA Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2017. DENTSPLY SIRONA is a global dental products and technology company operating through three segments: Implants, CAD/CAM, Prosthetics & Healthcare; Chairside Consumables & Endodontics; and Imaging, Treatment Centers & Orthodontics. The company realigned reporting responsibilities from two segments to three during the quarter, with prior periods revised for comparability.
The February 2016 merger with Sirona affects year-over-year comparisons. The first nine months of 2017 include two additional months of Sirona operations compared with the same period in 2016.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $1,009.2 million | $954.2 million | $2,902.4 million | $2,748.8 million |
| Net sales excluding precious metals | $999.8 million | $939.2 million | $2,872.2 million | $2,698.4 million |
| Gross profit | $559.0 million | $513.6 million | $1,595.2 million | $1,459.4 million |
| Gross margin excluding precious metals | 55.9% | 54.7% | 55.5% | 54.1% |
| Operating income (loss) | $107.9 million | $126.6 million | $(855.9) million | $320.5 million |
| Net income (loss) attributable to DENTSPLY SIRONA | $90.6 million | $92.5 million | $(899.6) million | $322.9 million |
| Diluted EPS | $0.39 | $0.39 | $(3.92) | $1.48 |
| Cash flow from operations | Not provided for quarter | Not provided for quarter | $373.0 million | $341.0 million |
Q3 reported sales increased 5.8%; sales excluding precious-metal content increased 6.5%. Constant-currency growth excluding precious metals was 4.3%, including 2.4% internal growth and a 1.9% acquisition benefit. Adjusted Q3 EPS was $0.70 versus $0.66 in the prior-year quarter, and adjusted operating income was $211.7 million, or 21.2% of sales excluding precious metals, versus $195.8 million, or 20.8%.
For the first nine months, adjusted net income was $428.7 million, or $1.84 per diluted share, compared with $459.0 million, or $2.11, in 2016. Adjusted operating income was $554.5 million, or 19.3% of sales excluding precious metals, compared with $597.8 million, or 22.1%.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $370.0 million at September 30, 2017, compared with $383.9 million at December 31, 2016.
- Total debt was approximately $1,622.1 million, consisting of $21.4 million of current debt and $1,600.7 million of long-term debt. The company estimated fair value of total debt at $1,623.3 million.
- Net debt to total capitalization increased to 14.3% from 12.4% at December 31, 2016. The company was in compliance with all debt covenants.
- No borrowings were outstanding under the $500.0 million multi-currency revolving credit facility. Total borrowing availability under identified credit lines was approximately $542.2 million.
- Operating cash flow of $373.0 million was partly offset by $235.8 million of investing outflows and $168.6 million of financing outflows, producing a $13.9 million decrease in cash.
- Capital expenditures were $98.6 million through September 30. Full-year 2017 capital expenditures were expected to be approximately $130 million to $150 million.
- Working capital indicators weakened: days sales outstanding increased to 65 days from 58 days at year-end, and inventory days increased to 133 from 113 on a constant-currency basis.
Material changes versus the prior comparable period
- Impairments: The company recorded a $1,092.9 million non-cash goodwill impairment charge in the second quarter related to CAD/CAM, Imaging and Treatment Center equipment reporting units, plus a $79.8 million impairment of indefinite-lived tradenames and trademarks. These charges drove the nine-month GAAP operating and net losses.
- Restructuring and unusual costs: Restructuring and other costs increased to $105.4 million for the first nine months from $15.6 million in 2016. Q3 included $7.5 million of legal-settlement costs. The company also recorded approximately $6.5 million related to an October 2017 settlement with Arges shareholders.
- Expense pressure: Q3 SG&A rose 13.6% to $430.5 million, and SG&A increased to 43.1% of sales excluding precious metals from 40.4%. Higher employment-agreement, professional-service and other costs offset part of the gross-margin improvement.
- Segment performance: Q3 sales excluding precious-metal content increased 4.8% in Implants, 7.6% in Chairside Consumables, and 7.4% in Imaging. Segment adjusted operating income increased 1.2%, 14.5%, and 73.9%, respectively.
- Distribution transition: Distributor inventory changes related to new Patterson and Henry Schein arrangements benefited Q3 sales by an estimated $8 million, but management expected an offsetting reduction in Q4. For the first nine months, distribution changes reduced sales by approximately $37 million, and management estimated a further $25 million to $30 million negative impact for the balance of 2017.
- Acquisition: The company acquired RTD, a France-based endodontic-post manufacturer, for approximately $132.0 million. The transaction was not material to Q3 sales or net income.
- Shareholder returns: The company repurchased 2.4 million shares for $151.4 million during the first nine months and paid $58.2 million of dividends. No repurchases occurred in Q3.
Guidance, outlook, risks and contingencies
- Management estimated a full-year 2017 non-GAAP tax rate of 17.9% and capital expenditures of approximately $130 million to $150 million.
- Germany and other regions are subject to manufacturing, logistics and distribution restructuring initiatives. Remaining costs were estimated at approximately $90 million over two years; an agreement reached in October 2017 was expected to generate approximately $25 million of Q4 2017 expense.
- Equipment demand, distributor inventory levels, channel-transition execution and new distribution agreements remain significant drivers of near-term sales volatility. The company noted lower end-user equipment demand, especially in the United States.
- Goodwill and intangible-asset valuations remain sensitive to revenue growth, operating margins, discount rates, market conditions and future cash flows. Further material impairment charges are possible, although no new impairment triggers were identified at September 30.
- Leadership changes announced after quarter-end included the resignations of the Executive Chairman and Chief Executive Officer, President and Chief Operating Officer, and Senior Vice President, Secretary and General Counsel. Interim executives were appointed and searches for permanent leadership were underway.
- The company continued to cooperate with an SEC investigation concerning accounting and disclosures and with government inquiries regarding export controls and economic sanctions. The outcomes and potential financial effects were not determinable.
- A November 2017 arbitration award related to the Roth Licensing matter awarded approximately $16.0 million in damages, fees and costs plus injunctive relief. The company intended to contest the award.
- The company planned to adopt ASC Topic 606 revenue recognition on January 1, 2018 using the modified retrospective method. Promotional and customer-loyalty programs were identified as the primary affected areas, but the filing did not provide a clear quantified impact.
Most important facts for investors to verify
- Whether distributor inventory reductions in Q4 2017 matched management’s estimated $25 million to $30 million sales headwind.
- Whether equipment demand and the Patterson/Henry Schein channel transition stabilized or caused further margin, sales or impairment pressure.
- The sustainability of adjusted operating margins after excluding substantial restructuring, amortization, legal and impairment-related items.
- Potential additional goodwill or intangible-asset impairments under updated forecasts and discount-rate assumptions.
- The financial and operational effects of senior-management turnover and the timing of permanent CEO and COO appointments.
- Developments in the SEC, export-control and sanctions inquiries and the Roth Licensing arbitration.
- The quantified effect of ASC Topic 606 adoption on revenue, retained earnings, systems, controls and disclosures.