DENTSPLY International Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. The filing presents unaudited consolidated results for DENTSPLY International Inc. and subsidiaries, a global professional dental products company operating in more than 120 countries. Approximately 97% of sales were from professional dental products.
Financial Performance and Position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $609.4 million | $565.1 million | $1,179.9 million | $1,111.0 million |
| Net sales excluding precious metals | $564.0 million | $518.8 million | $1,091.0 million | $1,016.2 million |
| Gross profit | $314.9 million | $287.6 million | $614.8 million | $569.6 million |
| Operating income | $97.0 million | $105.0 million | $195.6 million | $194.3 million |
| Net income attributable to DENTSPLY | $74.2 million | $72.4 million | $143.3 million | $134.2 million |
| Diluted earnings per share | $0.52 | $0.49 | $1.00 | $0.91 |
| Operating cash flow | Not separately provided | Not separately provided | $165.0 million | $150.5 million |
- Second-quarter net sales increased 7.8%; sales excluding precious metal content increased 8.7%. Six-month increases were 6.2% and 7.4%, respectively.
- Gross margin was 51.7% of reported sales in the quarter and 52.1% for the six-month period, compared with 50.9% and 51.3% in the prior-year periods. Excluding precious metal content, margins were 55.8% and 56.4%, up 0.4 and 0.3 percentage points.
- Second-quarter operating margin declined to approximately 15.9% from 18.6%, primarily due to higher SG&A and acquisition and restructuring costs. Six-month operating margin was approximately 16.6%, compared with 17.5%.
- Second-quarter net margin attributable to DENTSPLY was approximately 12.2%, compared with 12.8%; six-month net margin was approximately 12.1%, compared with 12.1%.
- SG&A increased 15.7% in the quarter and 11.2% year to date. Restructuring and other costs were $6.9 million in the quarter and $7.5 million year to date.
- The effective tax rate decreased to 19.4% in the quarter and 22.4% year to date, from 25.5% in both comparable prior-year periods. The decline primarily reflected revised assumptions regarding repatriation of foreign earnings and earnings mix.
- At June 30, 2011, cash and cash equivalents were $671.7 million, compared with $540.0 million at December 31, 2010. Total current assets were $1.55 billion and total current liabilities were $430.4 million.
- Long-term debt was $654.9 million, with notes payable and current debt of $8.5 million. Total debt was approximately $663.4 million, and long-term debt represented 24.0% of total capitalization.
- Operating cash flow was $165.0 million. Investing cash outflows were $45.6 million, including $25.3 million of capital expenditures and $20.1 million paid for acquisitions. Financing cash outflows were $36.1 million, including $79.5 million of share repurchases and $14.3 million of dividends.
Material Changes Versus Prior Comparable Period
- Revenue growth benefited from favorable foreign exchange rates, acquisitions and positive internal growth outside the Japanese market and Orthodontic business. Worldwide internal growth excluding those affected areas was 3.4% in the quarter and 4.0% year to date.
- Operating income was lower in the second quarter despite higher sales because SG&A rose substantially and restructuring and other costs increased from $0.2 million to $6.9 million. Year-to-date operating income was modestly higher.
- The France, United Kingdom, Italy and other European/Pacific Rim segment experienced strong sales growth but lower operating income, while the U.S. consumables segment delivered higher sales and operating income.
- The Canada/Latin America/Endodontics/Orthodontics segment’s sales growth was reduced by the Orthodontic supply disruption, although Endodontics and Latin America grew. The Dental Laboratory/Implants/Non-Dental segment’s results were mixed, with implant and non-dental growth offset by weaker laboratory sales.
- Cash increased by $131.7 million year to date, compared with a $110.0 million decrease in the prior-year period. Share repurchases declined from $176.6 million to $79.5 million.
- Goodwill increased to $1.39 billion from $1.30 billion, primarily reflecting acquisitions and foreign currency effects. Total assets increased to $3.66 billion from $3.26 billion.
Guidance, Outlook, Risks and Unusual Items
- Management’s long-term internal growth target is 4% to 6%, but it expects growth below that range for the remainder of 2011 because of the Japan disaster and slower global economic conditions.
- DENTSPLY announced an agreement to acquire Astra Tech AB for approximately $1.8 billion. Astra Tech reported approximately $535 million of 2010 worldwide revenue. Closing was expected by December 31, 2011, subject to regulatory approval and customary conditions.
- The company arranged financing commitments for the Astra Tech transaction, including a $1.0 billion bridge facility and a 364-day $250 million revolving facility. It also entered into a $500 million Treasury Rate Lock with an effective base yield of 3.02% plus spread and fees.
- On July 27, 2011, after the quarter-end, DENTSPLY replaced its $200 million revolving facility with a five-year, $500 million unsecured multi-currency revolving credit facility. The new facility includes leverage and interest coverage covenants and customary events of default.
- A key Japanese supplier affected by the March 2011 natural disaster supplied orthodontic products representing approximately 9% of consolidated sales excluding precious metals. Normal supply was not expected until the first half of 2012. Management estimated an earnings impact of approximately $0.03 per share in the second quarter and roughly twice that amount in each quarter of the second half of 2011.
- The company recorded approximately $6.0 million of Astra Tech-related costs in restructuring and other costs, plus orthodontic restructuring and business-continuity costs. Adjusted diluted EPS was $0.55 for the quarter and $1.04 year to date, versus reported EPS of $0.52 and $1.00.
- Pending litigation includes Cavitron-related class action matters and the Guidance Endodontics dispute. The Guidance verdict was reduced to approximately $4.08 million in punitive damages, but further proceedings and appeals remained possible. The filing states that a reasonable loss range could not be estimated and that an unfavorable resolution could materially affect operating results.
- Foreign exchange, interest rate, commodity, customer credit, inventory, regulatory and litigation risks remain material. The company also held $128.4 million of precious metals on consignment, creating potential financing needs if those arrangements were discontinued.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Important Facts for Investors to Verify
- Completion timing, regulatory status, final financing and integration costs of the Astra Tech acquisition.
- Actual recovery of Japanese orthodontic supply and the resulting customer-retention, revenue and margin effects.
- Execution of the new credit facilities, planned bond issuance and leverage after the Astra Tech closing.
- Whether reported sales growth is sustained after separating foreign exchange, acquisitions and precious metal pass-through revenue.
- Cash conversion and working-capital trends, particularly the increases in receivable and inventory days.
- Potential outcomes and accounting accruals for the Guidance Endodontics and Cavitron litigation matters.
- Effects of derivative valuations, foreign currency movements and the DIO convertible bond investment on reported earnings and accumulated other comprehensive income.