DENTSPLY SIRONA Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2018, filed August 7, 2018. DENTSPLY SIRONA is a global dental products and technology company operating through Technologies & Equipment and Consumables segments. Professional dental products represented approximately 92% of sales.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,042.1 million | $992.7 million | $1,998.2 million | $1,893.2 million |
| Net sales excluding precious metals | $1,032.7 million | $983.0 million | $1,978.5 million | $1,872.4 million |
| Gross profit | $552.8 million | $544.2 million | $1,066.9 million | $1,036.2 million |
| Gross margin excluding precious metals | 53.5% | 55.4% | 53.9% | 55.3% |
| Operating loss | $(1,154.1) million | $(1,048.0) million | $(1,085.4) million | $(963.8) million |
| Net loss attributable to DENTSPLY SIRONA | $(1,122.0) million | $(1,050.0) million | $(1,040.8) million | $(990.2) million |
| Diluted loss per share | $(4.98) | $(4.58) | $(4.60) | $(4.31) |
| Cash flow from operations | Not separately provided | Not separately provided | $172.0 million | $208.7 million |
Q2 reported sales increased 5.0%, while sales excluding precious metal content increased 5.1%. Constant-currency growth excluding precious metals was 1.3%, including a 0.4% acquisition benefit and 0.9% internal growth. Consumables performed better than Technologies & Equipment.
- Q2 adjusted EPS was $0.60 versus $0.65 in the prior-year quarter; adjusted net income was $136.8 million versus $150.7 million.
- Q2 adjusted operating income was $180.3 million, or 17.4% of sales excluding precious metals, versus $195.1 million, or 19.8%, in Q2 2017.
- Technologies & Equipment sales excluding precious metals rose 3.1%, but segment operating income declined 21.3% to $77.1 million.
- Consumables sales increased 7.3%, and segment operating income increased 18.9% to $146.0 million.
- Cash and cash equivalents were $239.3 million at June 30, 2018, down from $320.6 million at December 31, 2017.
- Total debt, including current debt, was approximately $1.8 billion; long-term debt was $1,586.6 million and current debt was $218.1 million. Net debt to total capitalization was 23.3%, versus 16.6% at year-end 2017.
- The company had $205.0 million of commercial paper outstanding, $4.1 million under uncommitted short-term lines, and $322.9 million of unused credit availability. It was in compliance with debt covenants.
- Six-month investing cash outflows included $81.2 million of capital expenditures and $130.5 million for acquisitions and equity investments. Financing outflows included $250.2 million of share repurchases and $39.7 million of dividends.
Material changes versus the prior comparable period
- Goodwill impairment was $1,085.8 million in Q2 2018, compared with $1,092.9 million in Q2 2017. The 2018 charge related primarily to CAD/CAM, Imaging and Orthodontics reporting units, reflecting lower forecasts, increased competition, distribution changes and higher risk assumptions.
- Indefinite-lived intangible impairment increased to $179.2 million from $79.8 million and was included in restructuring and other costs.
- Total restructuring and other costs rose to $188.9 million in Q2 and $199.1 million for six months, compared with $81.7 million and $84.8 million, respectively, in the prior periods.
- Gross margin excluding precious metals declined 190 basis points in Q2 and 140 basis points year to date, driven by product mix, manufacturing costs, pricing and foreign exchange.
- Operating cash flow declined $36.7 million year to date, primarily due to payments of accrued liabilities and higher inventories. Inventory days increased to 142 from 131 at December 31, 2017.
- Other income included a $44.1 million gain on the sale of the company’s DIO equity investment during the first quarter.
- The company acquired OraMetrix for $120.0 million, with an additional $30.0 million subject to earn-out provisions. OraMetrix provides orthodontic treatment-planning software, wire bending and clear-aligner manufacturing.
- Share repurchases totaled 5.4 million shares for $250.2 million during the first six months. The remaining repurchase authorization was $749.8 million at June 30.
Guidance, outlook, commentary, risks and unusual items
- Management expects distributor inventory reductions associated with the transition from exclusive to non-exclusive equipment distribution relationships to reduce 2018 sales by approximately $130 million to $135 million for the balance of the year and by approximately $135 million to $140 million on a full-year year-over-year basis.
- Full-year 2018 capital expenditures are expected to be approximately $190 million to $200 million.
- Management is pursuing a cost-reduction initiative targeted at approximately $100 million over several years and evaluating organizational simplification and supply-chain consolidation. Final plans were expected by the end of 2018; future restructuring charges could be material.
- Management cited aggressive competition, lower-cost products, weaker demand for premium equipment, unfavorable product mix, distributor inventory reductions and lower orthodontic margins as significant pressures.
- Goodwill and intangible valuations remain highly sensitive to revenue growth, operating margins, discount rates and industry conditions. A hypothetical 100-basis-point increase in discount rates or 10% reduction in fair value could have resulted in additional impairment for the Treatment Centers reporting unit, which had $292.7 million of goodwill at June 30.
- The company’s accounting for the Tax Cuts and Jobs Act remained provisional. The estimated cash liability for deemed repatriation of foreign earnings was approximately $1.0 million, but additional tax liabilities could be recorded. The company had not completed its GILTI accounting policy assessment.
- On July 27, 2018, the company amended and extended its revolving credit facility, increasing availability from $500 million to $700 million through July 27, 2023.
- The SEC Division of Enforcement requested documents and information concerning the company’s accounting and disclosures. The company is cooperating and cannot predict the outcome or potential financial impact.
- Other disclosed matters include a roughly $16.0 million arbitration award involving Roth Licensing, employment and wage-and-hour litigation, and a putative securities class action related to the 2016 Sirona merger.
- The company adopted ASC 606 revenue recognition and other accounting standards in 2018; prior-year information was generally not restated for ASC 606.
Most important facts for an investor to verify
- Whether the large impairment charges fully reflect the revised outlook for CAD/CAM, Imaging, Orthodontics and other reporting units, and whether further impairments are likely.
- Actual distributor inventory normalization and its effect on reported sales and Technologies & Equipment margins during the remainder of 2018.
- Progress toward the targeted $100 million cost savings, including the timing and amount of additional restructuring charges.
- Liquidity after share repurchases, acquisitions, dividends and increased commercial-paper borrowings, including compliance with debt covenants.
- Final tax accounting under the Tax Cuts and Jobs Act, including repatriation and GILTI effects.
- Developments in the SEC investigation and disclosed litigation, including potential financial or operational consequences.
- Whether adjusted earnings trends remain sustainable after excluding impairments, restructuring costs, amortization and other non-GAAP adjustments.