DENTSPLY International Inc. — FY2010 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2010, including fourth-quarter results. DENTSPLY designed, manufactured and marketed professional dental consumables, laboratory products and specialty products in more than 120 countries. Approximately 97% of sales, excluding precious-metal content, came from dental products; 63% of such sales were generated outside the United States. The filing predates the company’s later combination with Sirona Dental Systems.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $2,221.0 million | $2,159.4 million | 2.9% |
| Net sales excluding precious-metal content | $2,031.8 million | $1,990.7 million | 2.1% |
| Gross profit | $1,130.2 million | $1,106.4 million | 2.2% |
| Gross margin, including precious-metal content | 50.9% | 51.2% | Down 0.3 points |
| Gross margin, excluding precious-metal content | 55.6% | 55.6% | Flat |
| Operating income | $380.3 million | $381.2 million | Down 0.3% |
| Operating margin | 17.1% | 17.7% | Down 0.6 points |
| Net income attributable to DENTSPLY | $265.7 million | $274.3 million | Down 3.1% |
| Diluted EPS | $1.82 | $1.83 | Down $0.01 |
| Cash flow from operations | $362.3 million | $362.5 million | Essentially flat |
| Capital expenditures | $44.2 million | $56.5 million | Down $12.2 million |
| Cash and cash equivalents | $540.0 million | $450.3 million | Up $89.7 million |
| Total long-term debt, including current portion | $606.5 million | $453.7 million | Up $152.8 million |
Adjusted non-GAAP earnings were $277.9 million, or $1.90 per diluted share, compared with $275.7 million, or $1.84 per diluted share, in 2009. Adjustments primarily excluded restructuring and other costs, acquisition-related activities, the DIO derivative loss, tax-related adjustments and a derivative credit-risk adjustment.
Fourth-quarter 2010 net sales were $568.2 million, operating income was $95.6 million, net income attributable to DENTSPLY was $67.8 million and diluted EPS was $0.47. Fourth-quarter sales excluding precious-metal content were $520.7 million.
Material changes versus the prior comparable period
- Excluding precious-metal content, constant-currency sales increased 2.6%, consisting of 2.1% internal growth and 0.5% acquisition growth. Currency translation reduced reported growth by 0.5%.
- Constant-currency sales growth was 0.1% in the United States, 3.7% in Europe and 4.7% in other regions. Dental specialty and consumable products generally performed better than dental laboratory and small-equipment products.
- The Canada/Latin America/Endodontics/Orthodontics segment grew sales 7.1% and operating income 5.4%. The U.S., Germany and certain European consumables segment increased operating income 11.2% despite essentially flat sales.
- The Dental Laboratory/Implants/Non-Dental segment declined 2.9% in sales and 9.9% in operating income. The France/U.K./Italy and other regions segment increased sales 2.0% but reported a 12.7% decline in operating income.
- SG&A increased 2.9% to $738.9 million, and SG&A as a percentage of sales excluding precious-metal content rose to 36.4% from 36.1%, reflecting investments, product launches, salary increases and higher discretionary spending.
- Restructuring and other costs increased to $11.0 million from $6.9 million, including $5.8 million of restructuring costs and $5.2 million of other costs, of which $3.7 million related to legal matters.
- Net interest and other expense increased to $22.6 million from $17.9 million, primarily because of higher average debt, lower interest income and higher currency transaction losses.
- The company repurchased 6.7 million shares for $224.0 million at an average price of $33.36. Treasury shares increased to 21.0 million from 15.8 million.
Guidance, outlook, risks and unusual items
Management identified a long-term internal growth target of 4% to 6%, but expected 2011 internal growth to be below that range because of prevailing economic conditions. Management emphasized product innovation, cost reduction, operational consolidation, technology and process improvements, and acquisitions as principal growth and margin initiatives.
- 2010 acquisitions included small dental specialty distributors and an equipment manufacturer. DENTSPLY also acquired a 16% interest in South Korean implant maker DIO and purchased $49.7 million of DIO convertible bonds. The DIO investment generated a $1.1 million after-tax equity-method loss in 2010; the bond had a reported fair value of $66.0 million at year-end.
- Liquidity remained strong, with $540.0 million of cash and cash equivalents, $362.3 million of operating cash flow and $150.5 million of unused credit lines. However, debt increased materially, and total contractual obligations were $1.152 billion, excluding $19.2 million of unrecognized tax benefits whose settlement timing could not be estimated.
- The company had a $200.0 million revolving credit facility maturing in May 2013 and a $200.0 million commercial-paper facility, with $121.6 million outstanding under those facilities at year-end. The company was in compliance with applicable debt covenants.
- Material risks included global economic weakness, dental-market and reimbursement changes, foreign-exchange and interest-rate volatility, competitive and technological pressures, regulatory compliance, product liability and recalls, supply concentration for certain finished goods, acquisition integration, goodwill impairment, tax changes and debt-covenant or liquidity risk.
- Significant legal contingencies included putative class actions involving Cavitron ultrasonic scalers and a Guidance Endodontics matter involving an approximately $4.0 million compensatory verdict and $40.0 million punitive verdict. Management stated that a reasonable loss range could not be estimated for the identified litigation and that unfavorable resolutions could materially affect operating results, although it did not expect a material adverse effect on financial position.
- Precious metals held on consignment had a market value of approximately $122.6 million. Loss or nonrenewal of these arrangements could require additional financing and create inventory-valuation exposure.
Investor verification points
- Reconcile reported GAAP earnings of $1.82 per diluted share with management’s $1.90 adjusted figure and assess whether excluded costs are recurring.
- Review the increase in debt, maturities, interest-rate exposure, covenant calculations and available liquidity.
- Evaluate whether the 2011 outlook below the 4%–6% internal-growth target was realized and whether margin pressure from SG&A investments persisted.
- Assess the performance and valuation of the DIO equity and convertible-bond investment, including the significant Level 3 fair-value assumptions.
- Monitor the Guidance Endodontics and Cavitron litigation, tax contingencies, product-regulatory matters and potential recall exposure.
- Review foreign-exchange effects, hedging results and the sensitivity of earnings and equity to currency, interest-rate and commodity-price movements.