DENTSPLY International Inc. — Form 10-Q Summary
Business context and reporting period
Filed by DENTSPLY International Inc. for the quarter and six months ended June 30, 2014. The company manufactured and distributed dental and consumable medical-device products in more than 120 countries, with approximately 88% of sales derived from professional dental products. The filing’s registrant name predates the later DENTSPLY Sirona combination.
The three reportable segments were Dental Consumables and Certain International Businesses; Dental Specialty and Laboratory and Certain Global Distribution Businesses; and Healthcare and Emerging Markets Businesses. The interim financial statements were unaudited and prepared under U.S. GAAP.
Financial performance and key metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Net sales | $765.2 million | $761.0 million | $1,495.3 million | $1,493.1 million |
| Net sales excluding precious metal content | $730.9 million | $715.9 million | $1,420.1 million | $1,388.6 million |
| Gross profit | $424.5 million | $415.0 million | $818.7 million | $803.2 million |
| Operating income | $127.1 million | $122.9 million | $232.7 million | $216.7 million |
| Net income attributable to DENTSPLY | $90.0 million | $87.2 million | $162.9 million | $158.9 million |
| Diluted EPS | $0.62 | $0.60 | $1.13 | $1.10 |
| Operating cash flow | Not separately provided | Not separately provided | $220.2 million | $131.9 million |
Second-quarter net sales increased 0.6% on a reported basis and 2.1% excluding precious metal content. Six-month reported sales were essentially flat, while sales excluding precious metal content increased 2.3%. The six-month operating margin was 15.6%, compared with 14.5% in the prior-year period. Gross margin excluding precious metal content was 58.1% in the quarter and 57.6% year to date.
The second-quarter effective tax rate was 22.4%, compared with 20.9% in 2013. The six-month effective tax rate was 22.9%, compared with 14.1%, primarily because 2013 included $12.5 million of tax benefits related to U.S. federal legislative changes and prior-year tax matters.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $66.9 million at June 30, 2014, down from $75.0 million at December 31, 2013.
- Total debt, including current and long-term portions, was approximately $1.37 billion on the balance sheet; estimated fair value was $1.34 billion. Net debt to total capitalization was 33.5%, versus 35.2% at year-end 2013.
- Total unused credit lines were $511.1 million. Outstanding commercial paper under the revolving facility was $62.0 million, and short-term lines had $5.2 million outstanding.
- Operating cash flow of $220.2 million funded $48.8 million of capital expenditures, $54.6 million of treasury-stock repurchases and $18.5 million of dividends, while financing activities used $173.4 million of cash.
- The company expected full-year 2014 capital expenditures of approximately $120.0 million and projected pension and other postemployment contributions of $13.1 million.
- On July 23, 2014, after the reporting date, the company entered into a new unsecured $500.0 million multi-currency revolving credit facility maturing July 23, 2019. At June 30, the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Second-quarter diluted EPS increased 3.3% to $0.62; management’s adjusted diluted EPS increased 4.5% to $0.69 from $0.66.
- Six-month net income attributable to DENTSPLY increased 2.5%, while diluted EPS increased from $1.10 to $1.13.
- Six-month operating cash flow increased $88.4 million, primarily from substantially lower cash taxes and smaller working-capital increases.
- Restructuring costs declined to $1.2 million in the quarter and $2.0 million year to date, compared with $2.2 million and $2.8 million, respectively.
- Net interest and other expense declined by $2.8 million in the quarter and $8.8 million year to date, largely because prior-year derivative-related losses were lower in 2014 and average debt levels declined.
- Sales excluding precious metal content grew 7.6% in the Dental Consumables segment and 5.1% in Healthcare and Emerging Markets, but declined 1.2% in Dental Specialty and Laboratory in the quarter.
- The company recorded a $45.8 million reduction to DENTSPLY equity and acquired the remaining interest in a variable-interest entity; the related cash outflow was expected later in 2014.
- Foreign currency translation produced a $28.7 million after-tax reduction in other comprehensive income during the first six months, compared with an $88.3 million reduction in the prior-year period.
Guidance, outlook, commentary and risks
Management reported slight worldwide internal sales contraction of 0.6% in the second quarter, with modest U.S. growth offset by declines in Europe and the rest of the world. For the first six months, constant-currency sales growth was 1.0%; Europe declined 1.2%, while the rest of the world increased 7.0%.
Management described a long-term dental-market growth expectation of 3% to 6% and stated that it targets growth modestly above the market. It also targets adjusted operating margins of 20% over time through cost reductions, operational consolidation, technology and process improvements. The filing does not provide formal full-year revenue or EPS guidance.
- Inventory days increased to 123 from 114 at December 31, 2013 and 116 at June 30, 2013. Management attributed the increase partly to transition plans and expected inventory normalization by the end of 2015.
- The annual goodwill and indefinite-lived intangible-asset tests identified no impairment. However, a 10% hypothetical reduction in a reporting unit’s fair value would have produced an estimated $5.9 million goodwill shortfall for one unit with $122.7 million of goodwill.
- Pending matters included appeals and putative class-action litigation concerning Cavitron ultrasonic scalers, a qui tam complaint alleging illegal marketing activities, and government inquiries involving export controls and economic sanctions. Management did not believe losses were probable for the disclosed litigation and could not estimate a possible loss range.
- The company held $73.0 million of precious metals on consignment. Loss of those arrangements could require third-party financing to fund inventory ownership.
- Market risks included foreign exchange, interest rates and commodity prices. Cash-flow, net-investment and fair-value hedges had substantial notional amounts; the company expected to reclassify $7.6 million of deferred net hedge losses into earnings over the following 12 months.
- The company adopted certain FASB standards in 2014 without material impact. It expected to adopt the new revenue-recognition standard no later than March 31, 2017, but had not determined its impact.
Most important facts for an investor to verify
- Whether modest underlying sales growth and regional weakness, particularly in Europe, persisted after the second quarter.
- The sustainability of margin expansion, cost controls and management’s long-term 20% adjusted operating-margin target.
- Inventory normalization, working-capital requirements and the effect of elevated inventory days on future cash conversion.
- Refinancing or repayment of the $100.0 million Private Placement Note payment classified as current and the company’s ongoing covenant compliance.
- Potential financial, regulatory and reputational effects of the pending litigation and export-control or sanctions inquiries.
- The sensitivity of goodwill and intangible assets to weaker operating results, higher discount rates or adverse market conditions.
- The comparability of adjusted EPS, including amortization, restructuring, acquisition, derivative fair-value and tax adjustments excluded from the non-GAAP measure.