DENTSPLY SIRONA Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2016. DENTSPLY International merged with Sirona Dental Systems on February 29, 2016, creating DENTSPLY SIRONA Inc. The 2016 income statement includes Sirona results from February 29 through June 30; therefore, reported year-over-year comparisons are not fully comparable. The company operates in Dental and Healthcare Consumables and Technologies.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $1,022.0 million, up 46.4% | $1,794.6 million, up 32.5% |
| Net sales excluding precious metals | $1,004.7 million, up 48.9% | $1,759.2 million, up 34.7% |
| Gross profit / margin | $526.9 million / 51.6% | $945.8 million / 52.7% |
| Operating income / margin | $121.2 million / approximately 11.9% | $193.9 million / approximately 10.8% |
| Net income attributable to DENTSPLY SIRONA | $105.4 million | $230.4 million |
| Diluted EPS | $0.44, versus $0.31 | $1.11, versus $0.76 |
| Adjusted diluted EPS | $0.76, versus $0.73 | $1.46, versus $1.32 |
| Operating cash flow | Not separately provided | $188.1 million, versus $211.2 million |
Gross margin excluding precious metal content was 52.4% in the second quarter and 53.8% for the six-month period, down from 59.2% in both comparable 2015 periods. Management attributed the decline primarily to Sirona’s lower gross margin and merger-related fair-value adjustments, partly offset by efficiency savings and pricing.
At June 30, 2016, cash and cash equivalents were $311.6 million, total debt was approximately $1.18 billion, and long-term debt was $1.17 billion. The company had $552.0 million of unused credit capacity, no commercial paper borrowings under the revolving facility, and was in compliance with debt covenants. Net debt to total capitalization was 9.5%, compared with 27.1% at December 31, 2015.
Six-month investing cash flow was $486.3 million, including $522.3 million of cash acquired in the Sirona merger. Financing cash flow was negative $650.6 million, including $600.0 million of share repurchases and $28.6 million of dividends. Capital expenditures were approximately $47.8 million, and full-year 2016 capital expenditures were expected to be approximately $110 million to $125 million.
Material changes versus the prior comparable period
- Sirona contributed $438.3 million of sales and $102.4 million of operating income from the merger date through June 30, 2016.
- The all-stock merger issued approximately 101.8 million DENTSPLY shares and was recorded at approximately $6.26 billion of consideration. Goodwill increased to $5.79 billion and identifiable intangible assets increased to $3.03 billion.
- Second-quarter combined-business sales, adjusted for the merger, grew 3.4% on a constant-currency basis, including 2.4% internal growth. Six-month combined-business sales grew 4.9% on a constant-currency basis, including 4.0% internal growth.
- Second-quarter segment sales excluding precious metal content were $526.7 million for Dental and Healthcare Consumables and $478.0 million for Technologies. Segment adjusted operating income was $151.7 million and $112.1 million, respectively.
- Restructuring and other costs declined to $3.6 million in the quarter and $7.7 million year to date, compared with $38.9 million and $44.3 million, respectively, in 2015.
- Six-month income taxes included a $78.6 million benefit from releasing a valuation allowance on previously unrecognized foreign interest deduction carryforwards related to the merger. The reported six-month tax benefit was $40.0 million.
- The company repurchased 9.8 million shares for $600.0 million during the first six months and held 31.5 million treasury shares at June 30.
Guidance, outlook, risks and unusual items
- Management expects continued growth from product innovation, digital dentistry, efficiency programs, partnerships and acquisitions, but provided no specific revenue or EPS guidance in the filing.
- The company agreed to acquire MIS Implants Technologies for $375.0 million in cash, subject to closing conditions and regulatory clearances, with closing expected by year-end 2016. Funding was expected to use available cash, credit facilities and/or new debt.
- Foreign currency remains a significant exposure because approximately two-thirds of sales are generated outside the United States. Currency movements reduced six-month sales excluding precious metals by approximately 1.9% and diluted EPS by approximately $0.03.
- Second-quarter other income included approximately $13.2 million of currency transaction gains, principally related to Brexit-related foreign currency movements. Six-month other income also included a $5.7 million gain on the sale of a business.
- The merger accounting remains preliminary. Final valuation of acquired assets, liabilities and deferred taxes could materially change goodwill and other balances.
- Goodwill and indefinite-lived intangible asset impairment tests produced no impairment. However, a 10% decline in reporting-unit fair values would bring one Technologies reporting unit, carrying $66.0 million of goodwill, approximately to book value.
- Material contingencies include product-related class actions, an appeal concerning Cavitron scalers, an appeal of a dismissed False Claims Act matter, and ongoing government inquiries regarding export controls and economic sanctions. The company does not currently believe a loss is probable for the disclosed litigation, but cannot estimate a potential loss range; sanctions-related outcomes remain uncertain.
- The company expects to adopt the new revenue recognition standard in the quarter ending March 31, 2018. The filing states that the impact and transition method were still under evaluation.
Most important facts for investors to verify
- Separate underlying performance from the substantial consolidation impact of Sirona and from non-GAAP adjustments.
- Assess whether gross-margin pressure from Sirona, purchase accounting and amortization is offset by integration savings and pricing.
- Verify the sustainability of earnings excluding the $78.6 million tax valuation-allowance release and other unusual gains.
- Monitor integration execution, final purchase-price accounting, goodwill exposure and the planned $375.0 million MIS acquisition.
- Review cash conversion, working-capital increases, share repurchases, debt capacity and funding needs for acquisitions and capital expenditures.
- Track currency volatility, Brexit-related effects, litigation and export-control or sanctions inquiries.