DENTSPLY International Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter ended March 31, 2015. DENTSPLY manufactured and distributed dental consumables, laboratory products, specialty dental products, and consumable medical devices in more than 120 countries. Professional dental products represented approximately 89% of sales. The interim financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $656.3 million | $730.1 million | Down 10.1% |
| Net sales excluding precious metal content | $631.5 million | $689.2 million | Down 8.4% |
| Gross profit | $373.4 million | $394.2 million | Down 5.3% |
| Operating income | $97.7 million | $105.6 million | Down 7.4% |
| Net income attributable to DENTSPLY | $64.0 million | $72.9 million | Down 12.2% |
| Diluted EPS | $0.45 | $0.50 | Down 10.0% |
| Operating cash flow | $65.6 million | $64.6 million | Up $1.1 million |
- Gross margin was 56.9% of reported sales versus 54.0% in the prior-year quarter. Excluding precious metal content, gross margin was 59.1% versus 57.2%.
- Reported operating margin was 14.9% versus 14.5%. Based on sales excluding precious metal content, GAAP operating margin was 15.5% versus 15.3%.
- Adjusted diluted EPS was $0.59 in both periods. Adjusted operating margin was 18.7% versus 17.7%.
- The effective tax rate was 21.6% versus 23.5%, including a $0.3 million benefit from prior-year tax matters in 2015 and $1.6 million of prior-year tax expense in 2014.
- Equity in the loss of unconsolidated affiliate DIO was $4.4 million, compared with $0.3 million, including an approximately $4.6 million fair-value-related loss in 2015.
- Other comprehensive loss was $131.9 million, driven primarily by a $188.9 million foreign-currency translation loss, partially offset by derivative and available-for-sale securities gains.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents declined from $151.6 million at December 31, 2014 to $100.6 million at March 31, 2015.
- Operating cash flow was $65.6 million. Investing cash flow used $8.5 million, including $16.2 million of capital expenditures. Financing cash flow used $100.5 million.
- Financing uses included $88.7 million for treasury-stock repurchases, $80.5 million to acquire noncontrolling interests, $9.4 million of dividends, and $100.1 million of long-term borrowing repayments. These outflows were partly funded by a $160.1 million increase in short-term borrowings.
- Balance-sheet debt consisted of $247.6 million of notes payable and current debt and $1.079 billion of long-term debt. The filing reports total net debt to total capitalization of 36.1%, compared with 32.4% at year-end 2014.
- The company had $160.0 million of commercial paper outstanding under its $500.0 million multi-currency revolving facility and $2.8 million drawn under other short-term lines. Total unused credit availability was $395.6 million.
- The company was in compliance with its debt covenants. A $75.0 million Private Placement Notes payment due in February 2016 and an $8.8 million PNC Term Loan installment due in August 2015 were classified as current.
- Management expected 2015 capital expenditures of $100 million to $120 million and stated that operating cash flow, cash balances, commercial paper, revolving facilities and other credit sources were expected to fund debt service, capital expenditures, repurchases and other needs.
Material changes versus the prior comparable period
- Sales excluding precious metal content declined 8.4%, primarily because of a 9.7% unfavorable foreign-currency translation impact; constant-currency sales increased 1.3% and internal sales growth was 1.3%.
- U.S. constant-currency sales grew 3.7%, while Europe declined 0.6% and the rest of the world grew 1.4%.
- Segment sales excluding precious metal content declined 4.3% in Dental Consumables, Endodontic and Dental Laboratory, 10.7% in Healthcare, Orthodontic and Implant, and 13.6% in Select Developed and Emerging Markets.
- Segment operating income increased 8.2% in Healthcare, Orthodontic and Implant, but declined 3.2% in Dental Consumables, Endodontic and Dental Laboratory. Select Developed and Emerging Markets reported a $3.9 million operating loss versus a $1.3 million loss.
- Restructuring and other costs increased to $5.4 million from $0.8 million, related primarily to the global efficiency program.
- SG&A declined in dollars but increased to 42.8% of sales excluding precious metal content from 41.8%, reflecting biennial trade shows and higher professional fees.
- The company repurchased 1.7 million shares for $88.7 million and held 22.9 million treasury shares at quarter-end.
- Goodwill declined to $1.953 billion from $2.089 billion, and identifiable intangible assets declined to $613.5 million from $670.8 million, primarily because of foreign-exchange effects.
Guidance, outlook, commentary, risks and unusual items
- Management described long-term dental-market growth as approximately 3% to 6% annually and targeted a slight premium to market growth. It also targeted adjusted operating margins of 20% over time, while noting that achievement was not assured.
- Management expected foreign-exchange movements, particularly a weaker euro and a stronger Swiss franc, to materially affect 2015 reported sales and earnings.
- The company continued efficiency initiatives, including proposed restructuring of elements of its German laboratory business and manufacturing capabilities. Future restructuring charges could be material.
- Management updated goodwill impairment testing for selected reporting units and reported no material change to prior disclosures, but noted that weaker future cash flows could result in a goodwill impairment charge.
- Material contingencies include product-related class actions involving Cavitron ultrasonic scalers, a qui tam action alleging illegal marketing practices, and government inquiries concerning export controls and economic sanctions. The company did not believe a loss was probable for the disclosed litigation and could not estimate a possible loss range. An unfavorable outcome could materially affect results, liquidity or reputation.
- The company held $58.2 million of precious metals on consignment. Loss of these arrangements could require third-party financing to fund required inventory.
- The company used substantial currency, interest-rate and commodity hedges. Cash-flow hedge notional amounts totaled $500.5 million, and $14.9 million of deferred net gains were expected to be reclassified into earnings over the following 12 months.
- ASU 2014-08 was adopted without material impact. The company expected to adopt the new revenue-recognition standard, ASU 2014-09, for the quarter ended March 31, 2017, subject to then-current effective-date requirements.
Most important facts for investors to verify
- Whether constant-currency growth and U.S. performance offset continuing foreign-exchange pressure and weakness in Europe and emerging markets.
- Whether restructuring and efficiency initiatives deliver the targeted adjusted operating-margin expansion toward 20% without materially increasing charges.
- The liquidity impact of current debt maturities, commercial-paper refinancing and the elevated net-debt-to-capitalization ratio.
- The sustainability of cash flow after substantial share repurchases, noncontrolling-interest purchases, dividends and debt repayments.
- Potential goodwill impairment if reporting-unit cash flows fall below forecasts.
- Developments in the Cavitron litigation, qui tam action and export-control or sanctions inquiries, including any changes to the company’s assessment of potential loss.
- The effect of foreign-currency movements, derivative valuations and DIO’s fair-value losses on future GAAP earnings and accumulated other comprehensive income.