Glenn Coleman
Executive Vice President, Chief Financial Officer at DENTSPLY SIRONA
Thank you, Simon. Good morning, and thank you all for joining us. Before turning to our financial results, I'd like to introduce myself to those of you I've yet to meet. Having overseen financial and operational functions across several geographies and industries, including health care, I'm excited to take on this role as the company enters its next chapter. I joined Dentsply Sirona because I believe it's a great company with a legacy of strong brands and innovation. I look forward to working closely with Simon and the rest of the team to bring greater focus and discipline to our execution, advance our financial, operational and strategic goals and ultimately deliver long-term growth and value creation.
Today, I'll provide more detail on our third quarter financial results and an update on our 2022 outlook. But before I do, let me start with the recently announced completion of the previously disclosed internal investigation and accounting review. The findings resulted in a restatement of our third quarter 2021 10-Q and full year 2021 10-K. As disclosed in those amended filings, net sales were overstated for the third quarter and full year 2021 by $29 million and $20 million, respectively. The company also revised full year 2020 and 2019 financial statements for immaterial errors. The combination of the investigation and accounting review also resulted in several material weaknesses in internal control over financial reporting. We have developed a comprehensive remediation plan to implement a number of process enhancements and additional controls to strengthen our overall internal controls environment, including personnel changes, updates to the company's code of ethics and business conduct, creation of or enhancements to commercial and accounting policies and procedures and additional training for our team, including commercial, finance and accounting employees. I'd refer you to our amended 10-K for more specifics on these efforts.
We are already well underway with a number of these initiatives, and we'll continue to provide updates on progress. Now that the investigation and accounting review have concluded, we are even more focused on moving forward and executing on our strategic priorities.
Now let's turn to Q3 financial results on Slide 8. As previously announced, GAAP results were impacted by the recording of a noncash charge for the impairment of goodwill and intangible assets of $1.1 billion, net of tax, associated with two reporting units. This charge primarily reflects changes in macroeconomic factors, such as rising interest rates, foreign exchange headwinds and broad declines in equity valuations, as well as lower forecasted revenues, which are negatively impacting our financial projections. More information regarding the impairment charge is available in our third quarter 10-Q.
In the third quarter, the business delivered revenue of $947 million, in line with the preliminary results we announced previously. In comparison to prior year, organic sales declined by 0.7%, while reported sales declined by 8.9% due to the significant strengthening of the U.S. dollar versus foreign currencies. The difference between reported and organic sales was fully attributable to foreign exchange.
Gross profit was $539 million or 56.9% of sales and declined 100 basis points from the prior year, with half of the reduction coming from FX and the remainder from inflation and volume deleverage.
SG&A expenses were $361 million or 38.1% of sales. On an absolute basis, SG&A was flat sequentially and decreased by 3.6% year-over-year largely due to FX. R&D spend was $39 million or 4.2% of sales, up 50 basis points versus the prior year, reflecting Dentsply Sirona's continued commitment to developing innovative solutions for our customers, with the majority of the investments in digital technologies.
Operating income was $139 million, down 26.6% versus last year. Operating margin contracted to 14.7% due to lower volumes, particularly in the U.S. and China, and continued macro headwinds, including FX and inflation. As a result, EPS was $0.41 in the third quarter of 2022 as compared to $0.60 in the prior year quarter. We attribute $0.10 of the EPS decline to performance and inflation, $0.07 to foreign currency headwinds and the remainder to a higher tax rate. Operating cash flow was $109 million in the quarter and adjusted free cash flow conversion was 88%. The company has maintained a strong balance sheet and finished the quarter with $418 million of cash and cash equivalents on hand, with a net debt-to-EBITDA ratio of approximately 1.8 times.
The strength of our cash generation enables us to maintain our commitment to returning cash to shareholders while still allowing us to invest in the business. In the third quarter, we paid $27 million in dividends. Going forward, we expect to continue returning at least 50% of our free cash flow to shareholders through a combination of dividends and share repurchases.
We will also continue executing on our balanced capital allocation strategy, which includes opportunistic share repurchasing and investing organically to drive faster revenue growth over the long term. As a reminder, we have $740 million of authorization remaining under our share repurchase program.
Moving to segment performance in the quarter on Slide 10. Organic sales in Technologies & Equipment, or our T&E segment, grew 0.6% while Consumables declined 2.5%. The T&E segment organic sales growth was led by double-digit growth in clear aligners and continued strong global demand for imaging equipment. Ortho grew double digits in the quarter due to strong demand in both SureSmile and Byte offerings. SureSmile continues to benefit from regional expansion and new product offerings. As anticipated, Byte, our direct-to-consumer clear aligner brand, returned to growth in the quarter after facing tough year-over-year comps in the first half of the year.
While we are cautious on consumer spending trends entering Q4, we are pleased that Byte continued to show improvement in the third quarter. Given the momentum we have in the aligners business, we expect to see double-digit growth in the fourth quarter. The Equipment & Instruments business, or E&I, posted growth due to continued strong imaging demand despite ongoing supply chain constraints, which resulted in higher backlog for our 3D imaging technology in the quarter. Implants were flat in the quarter as growth in the U.S. and Europe was offset by lower volumes in China. We attribute the softness in China to continued COVID-related shutdowns and lower orders in anticipation of volume-based procurement taking effect. Our CAD/CAM business declined in the quarter due to tough year-over-year comps and lower wholesale orders through distributors in certain regions, where indicators are showing some softening of retail demand.
Moving to the Consumables segment. Organic sales declined by 2.5% versus prior year, primarily attributable to a weaker performance in the U.S. and lower volumes in China. These headwinds are partially offset by price increases and recent product launches, including ProTaper Ultimate and CEREC blocks.
Now turning to third quarter financial performance by region. U.S. sales were $357 million, representing an organic sales decline of 5.2%, driven by lower retail and wholesale volumes in CAD/CAM and certain consumables. These headwinds were partially offset by growth in clear aligners and imaging. Europe delivered another good quarter with sales of $358 million, and organic growth of 3% contributed to strong performance across the business, particularly in clear aligners and Endo. Demand for imaging and treatment centers also remained high despite supply constraints.
Rest of the World sales were $232 million and essentially flat on an organic basis versus the prior year. Lower sales in China were offset by increased adoption of digital dentistry technologies, particularly in countries such as Korea and Japan.
Moving to our outlook for 2022. Based upon our third quarter performance and fourth quarter estimates, which includes assumptions for a continued challenging macroeconomic environment, we are lowering our full year financial projections. Compared to the prior outlook, FX headwinds have become significantly more pronounced, and we now expect net sales in the range of $3.85 billion to $3.88 billion. We anticipate the full year sales and EPS impact of FX versus the prior year to be approximately $300 million and $0.30, respectively. FX headwinds represent a 120-basis point operating margin headwind for the year.
Full year organic sales are expected to decline approximately 2% as we're now anticipating stronger global recessionary headwinds, particularly in the U.S. and certain European markets. In China, we continue to see prolonged impacts from COVID-related shutdowns, which we accounted for in our prior outlook. Additionally, we're beginning to see the effects of volume-based procurement in China on our implants business. Over the long term, we believe VBP presents an opportunity for the business to increase volume, but in the near term, the effect on pricing will be a headwind.
We are closely monitoring global dental traffic and leading indicators on consumer behavior. Due to higher consumer inflation in major markets, we're expecting that there will be a slowdown in elective procedures such as clear aligners and implants, and dental volumes may skew towards more traditional procedures. This dynamic, coupled with higher interest rates, may reduce the demand for certain equipment in the coming months. We estimate that the full year operating margin will be greater than 15%, down from the prior outlook due to volume deleverage and supply chain headwinds.
With these updates, 2022 adjusted earnings per share is now expected to be in a range of $1.90 to $2, representing a reduction of $0.50 at the midpoint compared to the prior outlook. The key components of the EPS outlook change are shared on Slide 14 and include approximately $0.20 for a reduction coming from our U.S. underperformance, $0.05 from China headwinds associated with broader COVID shutdowns and VBP, $0.10 attributed to supply chain headwinds, $0.10 to FX and $0.05 due to an updated tax rate and share count assumptions.
In closing, despite disappointing third quarter results and a challenging macroeconomic environment, we are confident that our strong business foundation and balance sheet support our priorities to drive successful execution of our strategy. Myself, Simon and the entire leadership team are executing with urgency to address these headwinds and best position Dentsply Sirona for the future.
And with that, I'll now turn the call back to Simon.
