What happened
Shares of Dentsply Sirona (XRAY 1.61%) fell nearly 20% today after the company announced second-quarter and first-half 2018 earnings results. The hits just keep on coming for shareholders, as the dental solutions company was forced to record a goodwill and intangible impairment charge of $1.265 billion in the most recent quarter. Goodwill and intangible assets are recorded on the balance sheet when an acquisition is made; writing off the value of these line items generally means that the acquisition didn't live up to its potential.
Impairment charges don't just hint that a past capital investment missed the mark, but also impact present earnings. As a result, Dentsply Sirona delivered a GAAP (generally accepted accounting principles) net loss of $4.98 per share during the second quarter. While adjusted earnings per share (excluding the impairment charge) actually topped Wall Street expectations by a penny, that was hardly any consolation. Worse, management lowered its full-year 2018 guidance and announced that it's working on developing a comprehensive restructuring program, which is expected to begin turning the business around in early 2019.
As of 2:24 p.m. EDT, the stock had settled to a 18.3% loss. Shares have lost 40% since the beginning of the year.
Image source: Getty Images.
So what
Unfortunately, this is not a case of Wall Street overreacting with short-term thinking. Even CEO Don Casey acknowledged the underwhelming state of affairs for the business, stating:
We are clearly not satisfied with our performance. Our global management team is in the middle of an extensive review of the business and is putting together a comprehensive restructuring program. This restructuring plan is focused on accelerating growth, improving our margin through aggressive cost containment programs, and simplifying the organization. We will begin to execute against this plan immediately and expect it to deliver sustainable, consistent earnings growth and enhanced forecasting capability beginning in early 2019.
After ripping the bandage off, Dentsply Sirona management made things worse by significantly reducing full-year 2018 earnings guidance. Previously, shareholders were told to expect adjusted EPS of $2.55 to $2.65 per diluted share. Now the business is only expected to achieve adjusted EPS of $2.00 to $2.15 per diluted share for the entire year -- a 20% reduction at the midpoint.
Now what
The business is clearly struggling at the moment. It's also a little worrisome that Dentsply Sirona has now taken two separate billion-dollar-plus write-offs of goodwill since the beginning of 2017. Worse, goodwill and intangible assets still comprise 68% of all assets on the balance sheet. In other words, if the business continues to underperform -- or the restructuring plan calls for it -- then this may not be the last time goodwill impairments of that magnitude are announced.
