SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2009
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
For the transition period from ______________ to _______________
Commission File Number 0-16211
DENTSPLY International Inc.
(Exact name of registrant as specified in its charter)
Delaware 39-1434669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
221 West Philadelphia Street, York, PA 17405-0872
(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant’s telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
X
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: At July 29, 2009, DENTSPLY International Inc. (the “Company”) had 148,592,159 shares of Common Stock outstanding, with a par value of $.01 per share.
For Quarter Ended June 30, 2009
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (unaudited)
Consolidated Condensed Statements of Income
3
Consolidated Condensed Balance Sheets
4
Consolidated Condensed Statements of Cash Flows
5
Consolidated Statement of Changes in Equity
6
Notes to Unaudited Interim Consolidated Condensed
Financial Statements
7
Item 2 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations
26
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk
38
Item 4 - Controls and Procedures
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
39
Item 1A - Risk Factors
40
Item 2 - Unregistered Sales of Securities and Use of Proceeds
Item 4 - Submission of Matters to a Vote of Security Holders
Item 6 - Exhibits
Signatures
41
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DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
Six Months Ended
June 30,
2009
2008
(in thousands, except per share amounts)
Net sales
$
553,216
594,847
1,060,165
1,155,629
Cost of products sold
266,245
279,361
506,225
554,900
Gross profit
286,971
315,486
553,940
600,729
Selling, general and administrative expenses
185,138
200,867
364,366
384,869
Restructuring, impairments and other costs (Note 9)
3,125
1,458
4,695
1,662
Operating income
98,708
113,161
184,879
214,198
Other income and expenses:
Interest expense
5,268
7,901
11,421
16,153
Interest income
(1,512)
(4,685)
(3,468)
(9,895)
Other (income) expense, net
(68)
(51)
846
3,071
Income before income taxes
95,020
109,996
176,080
204,869
Provision for income taxes
24,440
31,297
45,571
58,015
Net income
70,580
78,699
130,509
146,854
Less: Net gain (loss) attributable to the
noncontrolling interests
381
51
(1,433)
Net income attributable to DENTSPLY International
70,199
78,648
131,942
146,828
Earnings per common share (Note 4):
-Basic
0.47
0.53
0.89
0.98
-Diluted
0.52
0.88
0.96
Cash dividends declared per common share
0.050
0.045
0.100
0.090
Weighted average common shares outstanding (Note 4):
148,577
148,851
148,546
149,394
150,057
151,790
149,822
152,371
See accompanying notes to Unaudited Interim Consolidated Condensed Financial Statements.
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CONSOLIDATED CONDENSED BALANCE SHEETS
December 31,
Assets
(in thousands)
Current Assets:
Cash and cash equivalents
251,871
203,991
Short-term investments
36
258
Accounts and notes receivables-trade, net (Note 1)
357,546
319,260
Inventories, net (Note 7)
309,431
306,125
Prepaid expenses and other current assets
113,621
120,228
Total Current Assets
1,032,505
949,862
Property, plant and equipment, net
429,935
432,276
Identifiable intangible assets, net
122,696
103,718
Goodwill, net
1,267,898
1,277,026
Other noncurrent assets, net
45,445
67,518
Total Assets
2,898,479
2,830,400
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable
93,420
104,329
Accrued liabilities
207,430
193,660
Income taxes payable
15,737
36,178
Notes payable and current portion
of long-term debt (Note 13)
273,906
25,795
Total Current Liabilities
590,493
359,962
Long-term debt (Note 13)
145,949
423,679
Deferred income taxes
70,508
69,049
Other noncurrent liabilities
287,407
318,297
Total Liabilities
1,094,357
1,170,987
Commitments and contingencies (Note 14)
Stockholders' Equity:
Preferred stock, $.01 par value; .25 million shares authorized;
-
Common stock, $.01 par value; 200 million shares authorized;
162.8 million shares issued at June 30, 2009 and December 31, 2008
1,628
Capital in excess of par value
192,501
187,154
Retained earnings
1,955,977
1,838,958
Accumulated other comprehensive income (Note 3)
58,277
39,612
Treasury stock, at cost, 14.2 million shares at June 30, 2009 and
14.2 million shares at December 31, 2008
(475,765)
(479,630)
Total DENTSPLY International Stockholders' Equity
1,732,618
1,587,722
Noncontrolling interests
71,504
71,691
Total Stockholders' Equity
1,804,122
1,659,413
Total Liabilities and Stockholders' Equity
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
26,373
23,943
Amortization
6,574
4,363
4,379
18,542
Share-based compensation expense
9,723
8,404
Restructuring, impairments and other costs
3,039
1,127
Stock option income tax benefit
(2,003)
(2,008)
Changes in operating assets and liabilities, net of acquisitions:
Accounts and notes receivable-trade, net
(34,458)
(49,711)
Inventories, net
2,291
(10,283)
4,124
(5,314)
(11,257)
9,179
(12,972)
(62)
Income tax payable
(9,878)
(9,754)
Other, net
(1,085)
3,745
Net cash provided by operating activities
115,360
139,025
Cash flows from investing activities:
Capital expenditures
(24,957)
(36,574)
Cash paid for acquisitions of businesses and equity investment, net of cash acquired
(2,986)
(2,415)
Purchases of short-term investments
(147,434)
Liquidation of short-term investments
214
12
Expenditures for identifiable intangible assets
(1,258)
(2,191)
Proceeds from sale of property, plant and equipment, net
998
799
Net cash used in investing activities
(27,989)
(187,803)
Cash flows from financing activities:
Net change in short-term borrowings
36,342
3,488
Cash paid for treasury stock
(9,778)
(95,467)
Cash dividends paid
(14,919)
(13,517)
Proceeds from long-term borrowings
77,799
Payments on long-term borrowings
(55,140)
Proceeds from exercise of stock options
5,850
5,741
Excess tax benefits from share-based compensation
2,003
2,008
Net cash used in financing activities
(35,642)
(19,948)
Effect of exchange rate changes on cash and cash equivalents
(3,848)
12,796
Net increase (decrease) in cash and cash equivalents
47,880
(55,930)
Cash and cash equivalents at beginning of period
169,384
Cash and cash equivalents at end of period
113,454
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Capital
Accumulated
Total DENTSPLY
in Excess
Other
International
Total
Common
of Par
Retained
Comprehensive
Treasury
Stockholders'
Noncontrolling
Stock
Value
Earnings
Income (Loss)
Equity
Interests
2007
$ 1,628
$173,084
$1,582,683
$ 145,819
$(387,108)
$ 1,516,106
$ 296
$ 1,516,402
noncontrolling interest
71,931
Comprehensive Income:
283,869
(599)
283,270
Other comprehensive income
(loss), net of tax:
adjustment
(71,521)
63
(71,458)
financial instruments
(13,986)
service cost, net
(20,700)
Comprehensive Income
177,662
(536)
177,126
Exercise of stock options
(7,268)
19,994
12,726
Tax benefit from stock options exercised
3,910
expense
17,290
Funding of Employee Stock Option Plan
62
118
180
Treasury shares purchased
(112,634)
RSU dividends
76
(76)
Cash dividends ($0.185 per share)
(27,518)
$187,154
$1,838,958
$ 39,612
$(479,630)
$ 1,587,722
$ 71,691
$ 1,659,413
Other comprehensive income, net of tax:
9,907
1,245
11,152
7,631
1
1,128
150,607
(187)
150,420
(6,386)
12,236
(61)
1,407
1,346
68
Cash dividends ($0.10 per share)
(14,855)
Balance at June 30, 2009
$192,501
$1,955,977
$ 58,277
$(475,765)
$ 1,732,618
$ 71,504
$ 1,804,122
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DENTSPLY International Inc. and Subsidiaries
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2009
The accompanying Unaudited Interim Consolidated Condensed Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. Results for interim periods should not be considered indicative of results for a full year. These financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s most recent Form 10-K/A filed May 1, 2009.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of DENTSPLY International Inc., as applied in the consolidated interim financial statements presented herein, are substantially the same as presented on pages 52 through 58 of the Annual Report Form 10-K/A for the fiscal year ended December 31, 2008, except as indicated below:
Accounts and Notes Receivable-Trade, Net
Accounts and notes receivables – trade, net are stated net of allowances for doubtful accounts and trade discounts, which were $22.1 million and $19.4 million at June 30, 2009 and December 31, 2008, respectively.
Business Acquisitions
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R) (“SFAS 141(R)”), “Business Combinations.” It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose the nature and financial effect of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company has adopted SFAS 141(R) in the first quarter of fiscal year 2009.
On April 1, 2009, the FASB issued FASB Staff Position (“FSP”) No. SFAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies,” which amends and clarifies SFAS 141(R) to address application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for fiscal years ending after December 15, 2008. The Company has adopted the FSP in the first quarter of fiscal year 2009, and as of June 30, 2009, the implementation did not impact the Company’s net income attributable to DENTSPLY International.
Noncontrolling Interests
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests (“NCI”) in Consolidated Financial Statements.” This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Company adopted SFAS 160 on January 1, 2009 and retrospectively reclassed NCI to equity in the Condensed Balance Sheet, retrospectively included NCI in consolidated net income and consolidated comprehensive income, and provided other applicable disclosures. The implementation of SFAS 160 did not impact the Company’s net income attributable to DENTSPLY International in the current or prior periods.
Fair Value Measurement
In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” which amends SFAS 157 by delaying its effective date by one year for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Therefore, beginning on January 1, 2008, this standard applies prospectively to new fair value measurements of financial instruments and recurring fair value measurements of non-financial assets and non-financial liabilities. The Company has adopted SFAS 157-2 in the first quarter of fiscal year 2009. The implementation of SFAS 157-2 did not impact the Company’s financial statements in the current or prior periods.
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In April 2009, the FASB issued FASB Staff Position No. SFAS 107-1 and APB 28-1, (“FSP 107-1”), “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods as well as annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The Company has disclosed the requirement information in Note 13, Financing Arrangements.
Subsequent Events
In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165 (“SFAS 165”), “Subsequent Events.” SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The Company has evaluated subsequent events through July 30, 2009, which is the date the financial statements have been filed with the Securities and Exchange Commission.
New Accounting Pronouncements
In December 2008, the FASB issued FASB Staff Position No. SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which amends SFAS 132(R) by providing guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The FSP is effective for fiscal years ending after December 15, 2009 with early application permitted. Upon initial application, the provisions of this staff position are not required for earlier periods that are presented for comparative periods. The Company is currently evaluating the impact of adopting this staff position on its disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166 (“SFAS 166”), “Accounting for Transfers of Financial Assets,” which is an amendment to SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 166 is effective for fiscal years beginning after November 15, 2009 and must be applied prospectively to new transfers of financial assets. The new standard eliminates the use of qualified special purpose entities, clarifies the derecognition criteria for a transfer accounted for as a sale, and expands the disclosure requirements among other things. The Company is currently evaluating the impact of adopting this new standard.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (“SFAS 167”), “Amendments to FASB Interpretation No. 46 (R).” SFAS 167 is effective for annual reporting periods that begin after November 15, 2009 and applies to all existing and new variable interest entities. The new standard significantly changes the consolidation model for variable interest entities. The Company is currently evaluating the impact of adopting this new standard.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168 (“SFAS 168”), “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.” SFAS 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” and establishes the “FASB Accounting Standards Codification ™” (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. All guidance contained in the Codification carries an equal level of authority. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company has evaluated this new statement, and has determined that it will not have a significant impact on the determination or reporting of our financial results.
Revisions in Classification
Certain revisions in classification have been made to prior years' data in order to conform to current year presentation.
NOTE 2 – STOCK COMPENSATION
The Company maintains the 2002 Equity Incentive Plan (the “Plan”) under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units (“RSU”) and stock appreciation rights, collectively referred to as “Awards.” Awards are granted at exercise prices that are equal to the closing stock price on the date of grant. The Company authorizes grants of 14,000,000 shares of common stock, plus any unexercised portion of cancelled or terminated stock options granted under the DENTSPLY International Inc. 1993, 1998, and 2002 Plans, subject to adjustment as follows: each January, if 7% of the total outstanding common shares of the Company exceed 14,000,000, the excess becomes available for grant under the Plan. No more than 2,000,000 shares may be awarded as restricted stock and restricted stock units, and no key employee may be granted restricted stock units in excess of 150,000 shares of common stock in any calendar year.
- 8 -
Stock options generally expire ten years after the date of grant under these plans and grants become exercisable over a period of three years after the date of grant at the rate of one-third per year, except when they become immediately exercisable upon death, disability or qualified retirement. Restricted stock units vest 100% on the third anniversary of the date of grant and are subject to a service condition, which requires grantees to remain employed by the Company during the three year period following the date of grant. In addition to the service condition, certain key executives are subject to performance requirements. It is the Company’s practice to issue shares from treasury stock when options are exercised.
Under SFAS 123(R), the Company continues to use the Black-Scholes option-pricing model to estimate the fair value of the non-qualified stock options. The assumptions used to calculate the fair value of the awards granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience.
The following table represents total stock based compensation expense and the tax related benefit for the three and six months ended June 30, 2009 and 2008:
(in millions)
Stock option expense
3.0
2.9
5.9
5.7
RSU expense
1.7
1.1
3.2
2.1
Total stock based compensation expense
4.7
4.0
9.1
7.8
Total related tax benefit
1.5
0.7
2.6
1.8
The remaining unamortized compensation cost related to non-qualified stock options is $19.3 million, which will be expensed over the weighted average remaining vesting period of the options, or 1.5 years. The unamortized compensation cost related to RSUs is $12.3 million, which will be expensed over the remaining restricted period of the RSUs, or 1.7 years.
The following table reflects the non-qualified stock options transactions from December 31, 2008 through June 30, 2009:
Outstanding
Exercisable
Weighted
Average
Aggregate
Exercise
Intrinsic
Shares
Price
(in thousands, except per share data)
December 31, 2008
11,285
26.75
41,428
8,185
24.71
37,796
Granted
152
27.65
Exercised
(399)
14.65
Forfeited
(125)
32.13
10,913
27.14
56,846
7,846
25.29
48,649
The weighted average remaining contractual term of all outstanding options is 6.2 years and the weighted average remaining contractual term of exercisable options is 4.8 years.
- 9 -
The following table summarizes the unvested restricted stock unit and restricted stock unit dividend transactions from December 31, 2008 through June 30, 2009:
Unvested Restricted Stock Units
Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2008
400
36.11
297
26.37
Vested
(2)
26.23
(16)
33.05
Unvested at June 30, 2009
679
31.96
NOTE 3 – COMPREHENSIVE INCOME
The balances included in accumulated other comprehensive income in the consolidated balance sheets are as follows:
Other comprehensive income:
Foreign currency translation adjustments, net of tax
91,338
(2,903)
97,821
Amortization of unrecognized losses
and prior year service cost, net of tax
(851)
208
(119)
Change in assumptions for the
Company's benefit plans
3,713
Net (loss) gain on derivative financial instruments, net of tax
(34,840)
16,167
(62,645)
Total other comprehensive income, net of tax
55,647
17,185
19,911
38,770
Total Comprehensive income
126,227
95,884
185,624
Comprehensive income attributable to
the noncontrolling interests
6,053
(1)
(26)
DENTSPLY International
120,174
95,885
185,650
During the quarter ended June 30, 2009, foreign currency translation adjustments included currency translation gains of $101.7 million and losses of $4.3 million on the Company’s loans designated as hedges of net investments. During the quarter ended June 30, 2008, foreign currency translation adjustments included currency translation losses of $8.8 million partially offset by gains of $5.9 million on the Company’s loans designated as hedges of net investments. During the six months ended June 30, 2009, foreign currency translation adjustments included currency translation gains of $5.4 million and gains of $5.6 million on the Company’s loans designated as hedges of net investments. During the six months ended June 30, 2008, foreign currency translation adjustments included currency translation gains of $108.1 million and losses of $10.3 million on the Company’s loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net gains on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.
- 10 -
Foreign currency translation adjustments
179,457
169,550
Unrecognized losses and prior service cost, net
(28,971)
(30,098)
Net loss on derivative financial instruments
(92,209)
(99,840)
The cumulative foreign currency translation adjustments included translation gains of $282.6 million and $278.1 million as of June 30, 2009 and December 31, 2008, respectively, offset by losses of $103.1 million and $108.5 million, respectively, on loans designated as hedges of net investments. These foreign currency translation adjustments were offset by net gains on derivatives financial instruments, which are discussed in Note 10, Financial Instruments and Derivatives.
NOTE 4 - EARNINGS PER COMMON SHARE
The dilutive effect of outstanding options and restricted stock is reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computation of basic and diluted earnings per common share:
Basic Earnings Per Common Share Computation
Common shares outstanding
Earnings per common share - basic
Diluted Earnings Per Common Share Computation
Incremental shares from assumed exercise
of dilutive options
1,480
2,939
1,276
2,977
Total shares
Earnings per common share - diluted
Options to purchase 4.6 million and 7.8 million shares of common stock that were outstanding during the three and six months ended June 30, 2009, respectively, were not included in the computation of diluted earnings per share since the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. Antidilutive shares during the three and six months ended June 30, 2008, were 1.3 million and 1.4 million, respectively.
NOTE 5 - BUSINESS ACQUISITIONS
During the first six months of 2009, the Company paid $3.0 million, net of cash acquired, primarily related to a payment for an additional purchase price related to an acquisition completed in 2007. The payment was related to provisions in the purchase agreement that allow for additional payments based on the post closing performance of the individual business.
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NOTE 6 - SEGMENT INFORMATION
The Company follows Statement of Financial Accounting Standards No. 131 ("SFAS 131"), “Disclosures about Segments of an Enterprise and Related Information.” SFAS 131 establishes standards for disclosing information about reportable segments in financial statements. The Company has numerous operating businesses covering a wide range of products and geographic regions, primarily serving the professional dental market. Professional dental products represented approximately 97% of sales for the periods ended June 30, 2009 and 2008.
The operating businesses are combined into operating groups, which have overlapping product offerings, geographical presence, customer bases, distribution channels, and regulatory oversight. These operating groups are considered the Company’s reportable segments under SFAS 131 as the Company’s chief operating decision-maker regularly reviews financial results at the operating group level and uses this information to manage the Company’s operations. The accounting policies of the groups are consistent with those described in the most recently filed 10-K/A Consolidated Financial Statements in the summary of significant accounting policies. The Company measures segment income for reporting purposes as net operating profit before restructuring, interest and taxes.
In January 2009, the Company moved several locations between segments which resulted in a change to the management structure and helped the Company gain operating efficiencies and effectiveness. The segment information below reflects this revised structure for all periods shown.
United States, Germany, and Certain Other European Regions Consumable Businesses
This business group includes responsibility for the design, manufacturing, sales and distribution for certain small equipment and chairside consumable products in the United States, Germany, and certain other European regions. It also has responsibility for the sales and distribution of certain Endodontic products in Germany.
France, United Kingdom, Italy and Certain Other European Countries, CIS, Middle East, Africa, Pacific Rim Businesses
This business group includes responsibility for the sales and distribution for certain small equipment, chairside consumable products, certain laboratory products and certain Endodontic products in France, United Kingdom, Italy, the Commonwealth of Independent States (“CIS”), Middle East, Africa, Asia (excluding Japan), Japan and Australia, as well as the sale and distribution of implant products and bone substitute/grafting materials in Italy, Asia and Australia. This business group also includes the responsibility for sales and distribution for certain laboratory products, implants products and bone substitution/grafting materials for Austria. It also is responsible for sales and distribution for certain small equipment and chairside consumable products, certain laboratory products, implant products and bone substation/grafting materials in certain other European countries. In addition this business group also includes the manufacturing and sale of Orthodontic products and certain laboratory products in Japan, and the manufacturing of certain laboratory and certain Endodontic products in Asia.
Canada/Latin America/Endodontics/Orthodontics
This business group includes responsibility for the design, manufacture, and/or sales and distribution of certain small equipment, chairside consumable products, certain laboratory products and Endodontic products in Brazil. It also has responsibility for the sales and distribution of most of the Company’s dental products sold in Latin America and Canada. This business group also includes the responsibility for the design and manufacturing for Endodontic products in the United States, Switzerland and Germany and is responsible for sales and distribution Company Endodontic products in the United States, Canada, Switzerland, Benelux, Scandinavia, Austria, Latin America and Eastern Europe, and for certain Endodontic products in Germany. This business group is also responsible for the world-wide sales and distribution, excluding Japan, as well as some manufacturing of the Company’s Orthodontic products. In addition, this business group is also responsible for sales and distribution in the United States for implant and bone substitute/grafting materials and the sales and distribution of implants in Brazil. This business group is also responsible for manufacture and sale certain products in the Company’s non-dental business.
Dental Laboratory Business/Implants/Non-Dental
This business group includes the responsibility for the design, manufacture, sales and distribution for most laboratory products, excluding certain countries mentioned previously, and the design, manufacture, and/or sales and distribution of the Company’s dental implant products and bone substitute/grafting materials, excluding sales and distribution of implants and bone substitute/grafting materials in the United States; Italy, Austria, and certain other Eastern European countries; Asia; and Australia. This business group is also responsible for most of the Company’s non-dental business.
- 12 -
Significant interdependencies exist among the Company’s operations in certain geographic areas. Inter-group sales are at prices intended to provide a reasonable profit to the manufacturing unit after recovery of all manufacturing costs and to provide a reasonable profit for purchasing locations after coverage of marketing and general and administrative costs.
Generally, the Company evaluates performance of the operating groups based on the groups’ operating income, excluding restructuring, impairment and other costs, and net third party sales, excluding precious metal content.
The following tables set forth information about the Company’s operating groups for the three and six months ended June 30, 2009 and 2008:
Third Party Net Sales
U.S., Germany, and Certain Other European
Regions Consumable Businesses
139,600
124,509
264,512
245,064
France, U.K., Italy, and Certain Other
European Countries, CIS, Middle East,
Africa, Pacific Rim Businesses
114,512
130,372
215,317
242,587
Canada/Latin America/Endodontics/
Orthodontics
157,306
168,551
301,986
322,349
Dental Laboratory Business/
Implants/Non-Dental
142,180
172,335
279,521
347,792
All Other (a)
(382)
(920)
(1,171)
(2,163)
Third Part Net sales, excluding precious metal content
The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with generally accepted accounting principles (“GAAP”), and is therefore considered a non-GAAP measure. This non-GAAP measure is discussed further in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and a reconciliation of net sales, excluding precious metal content, to net sales is provided below.
105,343
121,986
198,420
225,900
156,557
167,546
300,596
320,442
110,793
129,152
215,204
249,278
Total excluding Precious Metal Content
511,911
542,273
977,561
1,038,521
Precious Metal Content
41,305
52,574
82,604
117,108
Total including Precious Metal Content
(a) Includes: amounts recorded at Corporate headquarters.
- 13 -
Inter-segment Net Sales
23,649
34,278
46,729
64,715
3,063
4,601
6,447
8,816
24,219
29,720
52,817
54,828
25,544
29,255
49,926
56,947
43,021
49,310
81,347
95,674
Eliminations
(119,496)
(147,164)
(237,266)
(280,980)
Segment Operating Income
42,824
44,820
76,746
87,948
4,185
5,550
6,894
7,559
45,467
55,061
95,525
106,340
24,374
35,084
46,821
66,802
All Other (b)
(15,017)
(25,896)
(36,412)
(52,789)
101,833
114,619
189,574
215,860
Reconciling Items:
(3,125)
(1,458)
(4,695)
(1,662)
(5,268)
(7,901)
(11,421)
(16,153)
1,512
4,685
3,468
9,895
Other income (expense), net
(846)
(3,071)
(a) Includes: amounts recorded at Corporate headquarters and one distribution warehouse not managed by named segments.
(b) Includes: the results of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
- 14 -
569,154
556,125
France, U.K., Italy, and Certain Other European
Countries, CIS, Middle East, Africa,
Pacific Rim Businesses
376,651
385,050
777,787
763,479
959,503
942,504
215,384
183,242
(a) Includes: assets of Corporate headquarters, inter-segment eliminations and one distribution warehouse not managed by named segments.
NOTE 7 - INVENTORIES
Inventories are stated at the lower of cost or market. At June 30, 2009 and December 31, 2008, the cost of $9.1 million, or 2.9%, and $9.6 million, or 3.1%, respectively, of inventories was determined by the last-in, first-out (“LIFO”) method. The cost of other inventories was determined by the first-in, first-out (“FIFO”) or average cost methods. The Company establishes reserves for inventory estimated to be obsolete or unmarketable equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. The inventory valuation reserves were $30.9 million and $28.4 million as of June 30, 2009 and December 31, 2008, respectively.
If the FIFO method had been used to determine the cost of LIFO inventories, the amounts at which net inventories are stated would be higher than reported at June 30, 2009 and December 31, 2008 by $3.5 million at both dates.
Inventories, net of inventory valuation reserves, consist of the following:
Finished goods
187,907
184,226
Work-in-process
54,067
58,123
Raw materials and supplies
67,457
63,776
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NOTE 8 - BENEFIT PLANS
The following sets forth the components of net periodic benefit cost of the Company’s benefit plans and for the Company’s other postretirement employee benefit plans for the three and six months ended June 30, 2009 and June 30, 2008, respectively:
Defined Benefit Plans
Service cost
2,061
1,610
4,067
3,416
Interest cost
1,979
2,187
3,898
4,435
Expected return on plan assets
(981)
(1,207)
(1,939)
(2,365)
Amortization of transition obligation
59
116
124
Amortization of prior service cost
35
43
69
89
Amortization of net loss
415
(11)
818
Net periodic benefit cost
3,568
2,685
7,029
5,761
Other Postretirement Plans
14
13
27
25
155
157
311
313
37
101
74
220
207
439
412
The following sets forth the information related to the funding of the Company’s benefit plans for 2009:
Pension
Other Postretirement
Benefits
Actual, June 30, 2009
4,078
328
Projected for the remainder of the year
4,319
757
Total for year
8,397
1,085
NOTE 9 – RESTRUCTURING, IMPAIRMENTS AND OTHER COSTS
Restructuring Costs
During the three and six months ended June 30, 2009, the Company recorded restructuring costs of $3.1 million and $4.3 million, respectively. During the three and six months ended June 30, 2008, the Company recorded restructuring costs of $0.6 million and $0.8 million, respectively. These costs are recorded in “Restructuring, impairments and other costs in the income statement” and the associated liabilities are recorded in accrued liabilities and other non-current liabilities in the consolidated condensed balance sheet. These costs consist of employee severance benefits, payments due under operating contracts and other restructuring costs.
- 16 -
During 2009, the Company initiated several restructuring plans primarily related to the integration, reorganization and closure or consolidation of certain production and selling facilities in order to better leverage the Company’s resources by minimizing costs and obtaining operational efficiencies.
As of June 30 2009, the Company’s restructuring accruals were as follows:
Severance
2007 and
Prior Plans
2008 Plans
2009 Plans
Balance, December 31, 2008
664
2,806
3,470
Provisions and adjustments
(132)
2,402
1,497
3,767
Amounts applied
(86)
(893)
(979)
Balance, June 30, 2009
446
5,208
604
6,258
Lease/contract terminations
1,271
50
(82)
1,239
Other restructuring costs
108
56
164
421
522
(97)
(449)
(546)
112
28
140
Provisions and
Amounts
Adjustments
applied
United States, Germany, and Certain
Other European Regions
Consumable Businesses
1,286
325
(325)
France, U.K., Italy, and Certain
Other European Countries, CIS, Middle
190
222
(315)
97
East, Africa, Pacific Rim Businesses
(3)
Canada/Latin America/
Endodontics/Orthodontics
178
287
(427)
(4)
3,251
3,280
6,216
225
(225)
4,905
4,339
(1,607)
7,637
- 17 -
Impairments and Other Costs
Other costs of $0.4 million for the six months ended June 30, 2009 included costs primarily related to impairments of long-term assets and legal matters. A legal settlement in the amount of $0.9 million was recorded for the three months and six months ended June 30, 2008. These other costs are reflected in “Restructuring, impairments and other costs” in the income statement. Legal settlements are further discussed in Note 14, Commitments and Contingencies.
NOTE 10 – FINANCIAL INSTRUMENTS AND DERIVATIVES
The Company has adopted the Statement of Financial Accounting Standards No. 161 (“SFAS 161”),”Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 is effective for fiscal years beginning after December 15, 2008 and amends and expands the disclosure requirements of SFAS 133, “Accounting for Derivative Instruments and Hedging.” The Company’s expanded disclosures are included below.
Derivative Instruments and Hedging Activities
The Company's activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company's operating results and equity.
Certain of the Company's inventory purchases are denominated in foreign currencies, which expose the Company to market risk associated with exchange rate movements. The Company's policy generally is to hedge major foreign currency transaction exposures through foreign exchange forward contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. In addition, the Company's investments in foreign subsidiaries are denominated in foreign currencies, which create exposures to changes in exchange rates. The Company uses debt and derivatives denominated in the applicable foreign currency as a means of hedging a portion of this risk.
With the Company’s significant level of variable rate long-term debt and net investment hedges, changes in the interest rate environment can have a major impact on the Company’s earnings, depending upon its interest rate exposure. As a result, the Company manages its interest rate exposure with the use of interest rate swaps, when appropriate, based upon market conditions.
The manufacturing of some of the Company’s products requires the use of commodities, which are subject to market fluctuations. In order to limit the unanticipated impact on earnings from such market fluctuations, the Company selectively enters into commodity swaps for certain materials used in the production of its products. Additionally, the Company uses non-derivative methods, such as the precious metal consignment agreements to effectively hedge commodity risks.
Cash Flow Hedges
The Company uses interest rate swaps to convert a portion of its variable rate debt to fixed rate debt. As of June 30, 2009, the Company has three groups of significant variable rate to fixed rate interest rate swaps. One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed rate of 1.6% for a term of ten years, ending in March 2012. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed rate of 4.2% for a term of seven years, ending in March 2012. A third group of swaps has a notional amount of $150.0 million, and effectively converts the underlying variable interest rates to a fixed rate of 3.9% for a term of two years, ending March 2010. The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes.
The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. At June 30, 2009, the Company had swaps in place to purchase 1,365 troy ounces of platinum bullion for use in the production of its impression material products. The average fixed rate of this agreement is $1,331 per troy ounce. In addition, the Company had swaps in place to purchase 127,851 troy ounces of silver bullion for use in the production of its amalgam products at an average fixed rate of $14 per troy ounce.
The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory. In addition, exchange contracts are used by certain of the Company's subsidiaries to hedge intercompany inventory purchases, which are denominated in non-local currencies. The forward contracts that are used in these programs typically mature in twelve months or less. For these derivatives which qualify as hedges of future anticipated cash flows, the effective portion of changes in fair value is temporarily deferred in accumulated OCI and then recognized in earnings when the hedged item affects earnings.
- 18 -
Hedges of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. Currently, the Company uses non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments.
In the first quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Swiss francs 457.5 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $384.4 million. In the first quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 55.5 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $42.0 million. In the fourth quarter of 2006, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 80.4 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $64.4 million. In the first quarter of 2007, the Company entered into additional cross currency interest rate swaps with a notional principal value of Swiss francs 56.6 million paying three month Swiss franc Libor and receiving three month U.S. dollar Libor on $46.3 million. Additionally, in the fourth quarter of 2005, the Company entered into cross currency interest rate swaps with a notional principal value of Euro 358.0 million paying three month Euro Libor and receiving three month U.S. dollar Libor on $419.7 million. In the first quarter of 2009, the Company terminated Swiss francs 57.5 million cross currency swap at a fair value of zero. In the second quarter of 2009, the Company amended certain of its Swiss franc and Euro cross currency interest rate swaps to extend their maturity dates for an additional three years. Specifically, a total of Swiss francs 300 million have been extended to March and April of 2013 and a total of Euro 100 million have been extended to December 2013. The Swiss franc and Euro cross currency interest rate swaps are designated as net investment hedges of the Swiss and Euro denominated net assets. The interest rate differential is recognized in the earnings as interest income or interest expense as it is accrued, the foreign currency revaluation is recorded in accumulated other comprehensive income, net of tax effects.
The fair value of these cross currency interest rate swap agreements is the estimated amount the Company would (pay)/ receive at the reporting date, taking into account the effective interest rates and foreign exchange rates. As of June 30, 2009, the estimated net fair values of the swap agreements were negative $139.5 million, which are recorded in accumulated other comprehensive income, net of tax effects, accrued liabilities and other noncurrent liabilities.
At June 30, 2009, the Company had Euro-denominated, Swiss franc-denominated, and Japanese yen-denominated debt and cross currency interest rate swaps (at the parent company level) to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries. At June 30, 2009 and 2008, the accumulated translation gains on investments in foreign subsidiaries, primarily denominated in Euros, Swiss francs and Japanese yen, net of these net investment hedges, were $93.3 million and $190.1 million, respectively, which are included in accumulated other comprehensive income, net of tax effects.
The tables below summarize the Company’s derivatives at June 30, 2009. The fair value of all derivatives is based on quarter-end currency rates.
Notional Amounts
Fair Value Asset (Liability)
Foreign Exchange Forward Contracts
2010
Forward sale, 11.7 million Australian dollars
9,289
158
(8)
Forward purchase, 6.6 million British pounds
(10,069)
(754)
749
Forward sale, 16.3 million Canadian dollars
13,486
563
(543)
Forward purchase, 42.0 million Swiss francs
(38,695)
342
Forward sale, 5.6 million Danish Krone
1,061
8
Forward purchase, 7.5 million Euros
(10,491)
304
Forward purchase, 0.6 billion Japanese yen
(5,812)
(721)
436
Forward sale, 88.5 million Mexican Pesos
6,718
(81)
Forward sale, 13.2 million Taiwanese dollars
402
Total Foreign Exchange Forward Contracts
(34,111)
1,206
- 19 -
Notional Amount
Fair Value Asset
Interest Rate Swaps
2011
2012
2013 and Beyond
(Liability) 2009
Euro
703
2,015
1,327
5,638
(805)
Japanese yen
130,334
(3,075)
Swiss francs
59,905
(4,971)
US dollars
150,000
(2,630)
Total Interest Rate Swaps
152,015
191,566
(11,481)
Cross Currency Basis Swaps
1.14 pay CHF 3mo. Libor
rec. USD 3mo. Libor
143,312
74,098
52,164
276,486
(57,312)
Euros 358.0 million @ $1.18
pay EUR 3mo. Libor rec.
USD 3mo. Libor
362,412
(82,210)
Basis Swaps
505,724
416,965
(139,522)
Commodity Contracts
(Liability)2009
Silver Swap - U.S. dollar
(1,424)
(362)
18
Platinum Swap - U.S. dollar
(1,284)
(340)
(191)
Contracts
(2,708)
(702)
(173)
As of June 30, 2009, $3.8 million of deferred net losses on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified to current earnings during the next twelve months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases and interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable-rate debt) is eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company’s policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.
- 20 -
The following tables below summarize the fair value and balance sheet location of the Company’s derivatives:
Balance Sheet
Asset Derivatives Designated as Hedging Instruments
Classification
Foreign exchange contracts
Other current assets (1)
1,048
73
Commodity contracts
Total Asset Derivatives Designated as Hedging Instruments
1,139
Asset Derivatives Not Designated as Hedging Instruments
921
Total asset derivatives
2,060
Liability Derivatives Designated as Hedging Instruments
Interest rate contracts
7,087
3,590
644
16
191
Cross currency interest rate swaps
17,497
122,025
Total liability derivatives designated as hedging instruments
151,050
Liability Derivatives Not Designated as Hedging Instruments
805
176
Total liability derivatives not designated as hedging instruments
981
Total liability derivatives
152,031
(1) Reported on the Consolidated Condensed Balance Sheet as “Prepaid expenses and other current assets.”
- 21 -
The following tables summarize the income statement impact of the Company’s cash flow hedges:
Three Months Ended June 30, 2009
Derivatives in SFAS 133 Cash Flow
(Gain) Loss
Hedging Relationships
Income Statement
Reclassified from
Gain in OCI (1)
AOCI into income (2)
(2,068)
1,892
(468)
(310)
755
SG&A expenses
(115)
262
375
(1,519)
1,842
Six Months Ended June 30, 2009
(1,373)
3,342
(258)
(1,407)
880
(194)
1,122
904
371
2,645
Recognized
in Income (3)
Other expense, net
87
102
105
181
48
29
210
360
Derivatives in SFAS 133 Net Investment
Gain in
OCI (1)
(27,869)
(634)
(29,301)
831
(57,170)
197
12,914
(1,213)
(3,529)
2,443
9,385
1,230
(1) Amount of gain reported in OCI, effective portion.
(2) Amount of (gain) or loss reclassed from Accumulated Other Comprehensive Income (“AOCI”) into income, effective portion only.
(3) Amount of loss recognized in income, ineffective portion and amount excluded from effectiveness testing
- 22 -
Derivatives Not Designated as Hedging
Instruments under SFAS 133 Hedging
Relationships
Recognized in
Income
(731)
15,913
2
10
266
16,181
Amounts recorded in accumulated other comprehensive income related to cash flow hedging instruments follow:
(in thousands, net of tax)
Beginning balance
(6,268)
(2,843)
(7,874)
(1,573)
Changes in fair value of derivatives
(830)
3,510
354
2,033
Reclassifications to earnings from equity
1,093
(322)
1,515
Total activity
263
3,188
1,869
1,918
Ending balance
(6,005)
345
Amounts recorded in accumulated other comprehensive income related to hedges of net investments in foreign operations follow:
42,692
179,947
77,585
156,790
Foreign currency translation adjustment
89,998
(8,785)
4,512
108,087
Changes in fair value of:
foreign currency debt
(4,314)
5,933
5,414
(10,240)
derivative hedge instruments
(35,103)
12,979
5,762
(64,563)
50,581
10,127
15,688
33,284
93,273
190,074
NOTE 11 – FAIR VALUE MEASUREMENT
The Company records financial instruments at fair value with unrealized gains and losses related to certain financial instruments reflected in accumulated other comprehensive income on the consolidated condensed Balance Sheets. In addition, the Company recognizes certain liabilities at fair value. The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is impacted by a number of factors, including the type of financial instrument. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less, or no, pricing observability and a higher degree of judgment utilized in measuring fair value.
- 23 -
The Company has adopted the Statement of Financial Accounting Standards No. 157 (“SFAS 157”), and for a more detailed discussion of the definition of fair value and the three levels defined by the SFAS 157 hierarchy, refer to the Company’s 2008 Annual Report on Form 10-K/A.
The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2009 and December 31, 2008, which are classified as “Cash and cash equivalents,” “Other noncurrent assets, net,” “Other noncurrent liabilities,” and “Accrued liabilities.” As required by SFAS 157, financial assets and liabilities that are recorded at fair value as of the balance sheet date are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
As of June 30, 2009
Level 1
Level 2
Level 3
Money market funds
Commodity forward purchase contracts
Foreign exchange forward contracts
2,042
Total assets
253,931
Liabilities
Interest rate swaps
11,482
139,522
836
Total liabilities
As of December 31, 2008
2,053
206,046
2,055
12,529
1,931
148,935
163,395
Derivative valuations are based on observable inputs to the valuation model including interest rates, foreign currency exchange rates, future commodities prices and credit risks.
The commodity forward purchase contracts, interest rate swaps, and foreign exchange forward contracts are considered cash flow hedges and cross currency interest rate swaps are considered hedge of net investments in foreign operations as discussed in Note 10 Financial Instruments and Derivatives.
NOTE 12 – UNCERTAINTIES IN INCOME TAXES
FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation requires that the Company recognize in the financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure.
- 24 -
It is reasonably possible that certain amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date of the Company’s consolidated financial statements. Expiration of statutes of limitation in various jurisdictions could include unrecognized tax benefits of approximately $0.8 million. A favorable unrecognized tax benefit of approximately $6.7 million could occur as a result of final settlement and resolution of outstanding tax matters in foreign jurisdictions during the next twelve months.
NOTE 13 - FINANCING ARRANGEMENTS
In the second quarter of 2009, the Company’s U.S. dollar denominated private placement note, U.S. dollar commercial paper facility, and multi-currency revolving credit agreement were classified as short-term liabilities as they mature within the next twelve months. Notes payable and current portion of long-term debt, as classified on the condensed consolidated balance sheets, amounted to $273.9 million and $25.8 million at June 30, 2009 and December 31, 2008, respectively.
The Company estimates the fair value and carrying value of its total debt was $419.9 million as of June 30, 2009. The fair value of the Company’s long-term debt equaled its carrying value as the Company’s debt is variable rate and reflects current market rates. The interest rates on private placement notes, revolving debt and commercial paper are variable and therefore the fair value of these instruments approximates their carrying values.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Legal Proceedings
On January 5, 1999, the Department of Justice filed a Complaint against the Company in the U.S. District Court in Wilmington, Delaware alleging that the Company’s tooth distribution practices violated the antitrust laws and seeking an order for the Company to discontinue its practices. This case has been concluded and the District Court, upon the direction of the Court of Appeals, issued an injunction in May 2006, preventing DENTSPLY from taking action to restrict its tooth dealers in the U.S. from adding new competitive teeth lines.
Subsequent to the filing of the Department of Justice Complaint in 1999, a private party putative class action was filed based on allegations similar to those in the Department of Justice case, on behalf of dental laboratories who purchased Trubyte teeth or products containing Trubyte teeth. The District Court granted the Company’s Motion on the lack of standing of the laboratory class action to pursue damage claims. The Plaintiffs appealed this decision to the Third Circuit and the Court largely upheld the decision of the District Court in dismissing the Plaintiffs’ damages claims against DENTSPLY, with the exception of allowing the Plaintiffs to pursue a damage claim based on a theory of resale price maintenance between the Company and its tooth dealers. The Plaintiffs then filed an amended complaint in the District Court asserting that DENTSPLY and its tooth dealers, and the dealers among themselves, engaged in a conspiracy to violate the antitrust laws. The District Court has granted the Motions filed by DENTSPLY and the dealers, to dismiss Plaintiffs’ claims, except for the resale price maintenance claims. The Plaintiffs have appealed the dismissal of these claims to the Third Circuit. Also pending is a case filed by a manufacturer of a competitive tooth line seeking unspecified damages alleged to have been incurred as a result of the Company’s tooth distribution practices, including the practice found to be a violation of the antitrust law.
On June 18, 2004, Marvin Weinstat, DDS and Richard Nathan, DDS filed a class action suit in San Francisco County, California alleging that the Company misrepresented that its Cavitron® ultrasonic scalers are suitable for use in oral surgical procedures. The Complaint seeks a recall of the product and refund of its purchase price to dentists who have purchased it for use in oral surgery. The Court certified the case as a class action in June 2006 with respect to the breach of warranty and unfair business practices claims. The class is defined as California dental professionals who purchased and used one or more Cavitron® ultrasonic scalers for the performance of oral surgical procedures. The Company filed a motion for decertification of the class and this motion was granted. Plaintiffs have appealed the decertification of the class to the California Court of Appeals.
On December 12, 2006, a Complaint was filed by Carole Hildebrand, DDS and Robert Jaffin, DDS in the Eastern District of PA. The case was filed by the same law firm that filed the Weinstat case in California. The Complaint asserts putative class action claims on behalf of dentists located in New Jersey and Pennsylvania. The Complaint seeks damages and asserts that the Company’s Cavitron® ultrasonic scaler was negligently designed and sold in breach of contract and warranty arising from misrepresentations about the potential uses of the product because it cannot assure the delivery of potable or sterile water. Plaintiffs have filed their Motion for class certification to which the Company has filed its response.
As of June 30, 2009, a reasonable estimate of a range of loss related to current litigation cannot be made.
Purchase Commitments
From time to time, the Company enters into long-term inventory purchase commitments with minimum purchase requirements for raw materials and finished goods to ensure the availability of products for production and distribution. These commitments may have a significant impact on levels of inventory maintained by the Company.
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DENTSPLY International Inc. and Subsidiaries Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The nature and geographic scope of the Company’s business subjects it to changing economic, competitive, regulatory and technological risks and uncertainties. In accordance with the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors, which, among others, could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein. All forward-looking statements made by the Company are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s actual results, performance and achievements, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These statements are identified by the use of such terms as “may,” “could,” “expect,” “intend,” “believe,” “plan,” “estimate,” “forecast,” “project,” “anticipate” or words of similar import.
Investors are cautioned that forward-looking statements involve risks and uncertainties which may materially affect the Company's business and prospects, and should be read in conjunction with the risk factors and uncertainties discussed within Item 1A, Part I of this Annual Report on Form 10-K/A as filed on May 1, 2009. Investors are further cautioned that the risk factors in Item 1A, Part I of this Annual Report on Form 10-K/A may not be exhaustive and that many of these factors are beyond the Company’s ability to control or predict. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results. The Company undertakes no duty and has no obligation to update forward-looking statements.
OVERVIEW
DENTSPLY International Inc. believes it is the world's largest designer, developer and manufacturer of professional dental products. The Company is headquartered in the United States (“U.S.”) and operates in more than 120 other countries, principally through its foreign subsidiaries. The Company also has strategically located distribution centers to enable it to better serve its customers and increase its operating efficiency. While the U.S. and Europe are the Company's largest markets, the Company serves all of the major professional dental markets worldwide.
The Company has three main product categories: 1) Dental Consumable Products; 2) Dental Laboratory Products; and 3) Dental Specialty Products.
Dental consumable products consist of dental sundries and small equipment used in dental offices by general practitioners in the treatment of patients. DENTSPLY’s dental sundry products in the dental consumable category include dental anesthetics, prophylaxis paste, dental sealants, impression materials, restorative materials, tooth whiteners and topical fluoride. The Company manufactures a wide variety of different dental sundry consumable products marketed under more than one hundred brand names. Small equipment products in the dental consumable category consist of various durable goods used in dental offices for treatment of patients. DENTSPLY’s small equipment products include high and low speed handpieces, intraoral curing light systems, dental diagnostic systems, and ultrasonic scalers and polishers.
Dental laboratory products are used in the preparation of dental appliances by dental laboratories. DENTSPLY’s products in the dental laboratory category include dental prosthetics, including artificial teeth, precious metal dental alloys, dental ceramics, and crown and bridge materials. This category also includes fabricated dental appliances, computer aided design software and centralized manufacturing of frameworks. Equipment in this category includes computer aided machining (CAM) ceramic systems and porcelain furnaces.
Dental specialty products are specialized treatment products used within the dental office and laboratory settings. DENTSPLY’s products in this category include endodontic instruments and materials, implants and related products, bone grafting materials, and orthodontic appliances and accessories.
The principal measurements used by the Company in evaluating its business are: (1) constant currency growth in the U.S., Europe and all other regions; (2) internal growth in the U.S., Europe and all other regions; (3) operating margins of each reportable segment; (4) the development, introduction and contribution of innovative new products; (5) growth through acquisition; and (6) continued focus on controlling costs and enhancing efficiency. The Company defines “internal growth” as the increase or decrease in net sales from period to period, excluding (1) precious metal content; (2) the impact of changes in currency exchange rates; and (3) the net sales, for a period of twelve months following the transaction date, of businesses that have been acquired or divested. The Company defines “constant currency growth” as internal growth plus acquisition growth.
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Management believes that an average overall internal growth rate of 4-6% is a long-term sustainable rate for the Company. The internal growth rate may vary outside of this range based on weaker or stronger economic conditions. Management expects the Company to operate below this range in the near future due to the current adverse economic conditions; however, history shows that growth in the dental industry typically performs better than the overall economy. Management expects this trend to continue in light of the current economic environment, although to a lesser degree. There can be no assurance that the Company’s assumptions concerning the growth rates in its markets or the dental market generally will continue in the future. If such rates are less than expected, the Company’s projected growth rates and results of operations may be adversely affected.
Price changes, other marketing and promotional programs offered to customers from time to time, the management of inventory levels by distributors and the implementation of strategic initiatives, may impact sales and inventory levels in a given period. Due to the current economic conditions, the overall dental market has been negatively impacted by inventory reductions in its distribution channels, particularly in certain emerging market regions.
Due to the international nature of DENTSPLY’s business, movements in global foreign exchange rates may impact the statement of income. With approximately 60% of the Company’s sales located in regions outside the U.S., the Company’s sales are significantly impacted by the strengthening or weakening of the U.S. dollar against other currencies. As discussed further under regional sales and the segment descriptions, the Company was negatively impacted by the movements in currencies.
Product innovation is a key component of the Company's overall growth strategy. New advances in technology are anticipated to have a significant influence on future products in dentistry. As a result, the Company continues to pursue several research and development initiatives to support this technological development, including partnerships and collaborations with various research institutions and dental schools. In addition, the Company licenses and purchases technologies developed by third parties. Although the Company believes these activities will lead to new innovative dental products, they involve new technologies and there can be no assurance that commercialized products will be developed.
Although the professional dental market in which the Company operates has experienced consolidation, it is still a fragmented industry. The Company continues to focus on opportunities to expand the Company’s product offerings through acquisition. Management believes that there will continue to be adequate opportunities to participate as a consolidator in the industry for the foreseeable future.
The Company has always maintained its focus on minimizing costs and achieving operational efficiencies. In response to the recent credit crisis and the recessionary economic conditions, management is concentrating on cost containment that focuses the business on creating and maintaining operational and financial flexibility through control of operating costs. Management will continue to evaluate the consolidation of operations or functions and reduce the cost of those operations and functions while improving service levels. In addition, the Company remains focused on enhancing efficiency through expanded use of technology and process improvement initiatives. The Company believes that the benefits from these initiatives will improve the cost structure and offset areas of rising costs such as energy, employee benefits, and regulatory oversight and compliance.
The Company initiated several restructuring plans that included global headcount reductions and business consolidations and reorganizations in late 2008 and the first half of 2009. The Company will begin to realize the cost savings associated with these restructuring plans in 2009 and expects to realize the full cost savings associated with these restructuring plans in 2010. (See also Note 9, Restructuring, Impairments and Other Costs, to the Unaudited Interim Consolidated Condensed Financial Statements.)
RESULTS OF CONTINUING OPERATIONS, QUARTER ENDED JUNE 30, 2009 COMPARED TO QUARTER ENDED JUNE 30, 2008
Net Sales
Management believes that the presentation of net sales, excluding precious metal content, provides useful information to investors because a portion of DENTSPLY’s net sales is comprised of sales of precious metals generated through sales of the Company’s precious metal alloy products, which are used by third parties to construct crown and bridge materials. Due to the fluctuations of precious metal prices and because the precious metal content of the Company’s sales is largely a pass-through to customers and has minimal effect on earnings, DENTSPLY reports sales both with and without precious metal content to show the Company’s performance independent of precious metal price volatility and to enhance comparability of performance between periods. The Company uses its cost of precious metal purchased as a proxy for the precious metal content of sales, as the precious metal content of sales is not separately tracked and invoiced to customers. The Company believes that it is reasonable to use the cost of precious metal content purchased in this manner since precious metal alloy sale prices are typically adjusted when the prices of underlying precious metals change.
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The presentation of net sales, excluding precious metal content, is considered a measure not calculated in accordance with generally accepted accounting principles (GAAP), and is therefore considered a non-GAAP measure. The Company provides the following reconciliation of net sales to net sales, excluding precious metal content. The Company’s definitions and calculations of net sales, excluding precious metal content, and other operating measures derived using net sales, excluding precious metal content, may not necessarily be the same as those used by other companies.
$ Change
% Change
553.2
594.8
(41.6)
(7.0%)
Precious metal content of sales
(41.3)
(52.5)
11.2
(21.3%)
Net sales, excluding precious metal content
511.9
542.3
(30.4)
(5.6%)
Net sales, excluding precious metal content, for the three months ended June 30, 2009, were $511.9 million, 5.6% lower than the prior year second quarter. The change in net sales, excluding precious metal content, was driven by currency translation, which reduced sales by 6.1%, partially offset by 0.5% growth on a constant currency basis. The constant currency sales growth was comprised of acquisition growth of 4.4%, partially offset by internal growth of negative 3.9%. Excluding the non-dental business, sales grew on a constant currency basis by 1.2%. Internal growth was negative 3.1% for the dental business, which was negatively impacted by weaker demand in 2009, dealer inventory reductions in certain geographies outside the U.S., dealer inventory reductions in the U.S. laboratory business, and lower sales of dental laboratory equipment. Internal growth was also negatively impacted by the timing of the Easter holiday.
Constant Currency and Internal Sales Growth
United States
Net sales, excluding precious metal content, decreased 2.1% in the United States in the second quarter on a constant currency basis, including 1.1% acquisition growth and internal growth of negative 3.2%. The lower sales growth was primarily driven by significantly lower sales in the non-dental business, dealer inventory reductions, and lower sales in the dental laboratory business, in particular, dental laboratory equipment. The dental consumables businesses and the dental specialties businesses in aggregate were flat.
Europe
Net sales, excluding precious metal content, in Europe improved by 0.9% on a constant currency basis. The Company experienced positive constant currency growth in the dental specialty and dental consumable businesses primarily related to acquisitions completed in 2008. Internal growth decreased 6.6% primarily due to significant sales reductions in Eastern Europe, which was affected by unfavorable foreign exchange movements and customer liquidity constraints. The more developed European countries were down slightly due to the timing of the holiday schedule and lower sales in dental laboratory equipment.
All Other Regions
Net sales, excluding precious metal content, in the other regions of the world increased by 4.2% on a constant currency basis. Internal growth was flat. The Company experienced solid internal growth in the dental specialty businesses offset by continued softness in all other businesses.
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Gross Profit
287.0
315.5
(28.5)
(9.0%)
Gross Profit as a percentage of net
sales, including precious metal content
51.9%
53.0%
sales, excluding precious metal content
56.1%
58.2%
The 2.1% decrease in gross profit as a percentage of net sales, excluding precious metal content, for the three months ended June 30, 2009 compared to the three months ended June 30, 2008 was due to unfavorable movements in exchange rates, acquisition related activities, lower production volumes, and unfavorable geographic and product mix.
Operating Expenses
Selling, general and administrative expenses (“SG&A”)
185.1
200.9
(15.8)
(7.9%)
3.1
1.6
NM
SG&A as a percentage of net
33.5%
33.8%
36.2%
37.1%
SG&A Expenses
SG&A expenses, measured against sales, excluding precious metal content, decreased to 36.2% in 2009 from 37.1% in 2008. The decrease is primarily related to cost containment efforts and the impact of a stronger average U.S. dollar were offset partially by acquisitions completed in 2008, which generally have a higher SG&A as a percentage of net sales, excluding precious metal content, than our base business.
Restructuring, Impairments and Other Costs, Net
During the three months ended June 30, 2009, the Company recorded restructuring, impairments and other costs of $3.1 million. These costs are related to new and ongoing restructuring plans to reduce operational costs through consolidation of facilities, global headcount reductions and business re-organizations. (See also Note 9, Restructuring, Impairments and Other Costs, to the Unaudited Interim Consolidated Condensed Financial Statements).
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Other Expense and Income, Net
Net interest expense
3.8
0.6
Other (income)
(0.1)
(0.0)
Net interest and other expense
3.7
0.5
Net Interest Expense
The change in net interest expense in 2009 compared to 2008, for the three months ended June 30, was mainly the result of a $1.8 million reduction to net interest expense in 2008 related to the adoption of SFAS 157, “Fair Value Measurements.” Net interest was also impacted in the second quarter of 2009 from the significantly lower Euro interest rates and lower average debt balances combined with stronger U.S. dollar average exchange rates. Interest income decreased $3.2 million from both the SFAS 157 adjustment last year and from the lower interest rates on Euro investment balances, which were 360 basis points lower in the current year than the prior year. In addition, the U.S. dollar was stronger against the Euro. Interest expense decreased $2.6 million on lower average debt and interest rates.
Other Expense, Net
Other expense in the 2009 period included approximately $0.2 million of currency transaction gains and $0.1 million of other non-operating costs. The 2008 period included $0.4 million of currency transaction gains and $0.4 million of other non-operating costs.
Income Taxes and Net Income
(in millions, except per share data)
Income tax rates
25.7%
28.5%
70.2
78.6
(8.4)
(10.7%)
Earnings per common share:
- Diluted
The Company’s effective tax rate for the three months ended June 30, 2009 decreased to 25.7% from 28.5% for the same period in 2008. This decrease primarily relates to the benefits from a European legal entity restructuring that occurred in 2008.
For the period ending June 30, 2009, net income attributable to DENTSPLY International decreased $8.4 million, or negative 10.7%, to $70.2 million. Fully diluted earnings per share were $0.47 in the second quarter 2009, a decrease of 9.6% from $0.52 in the second quarter 2008. Net income attributable to DENTSPLY International for the second quarter of 2009 included acquisition related activity, net of tax and non-controlling interest, of $0.5 million or $0.00 per diluted share, restructuring, impairments and other costs, net of tax and non-controlling interest, of $2.2 million or $0.01 per diluted share, a net tax reduction of $0.2 million due to tax related adjustments, and favorable rounding of $0.01. Net income for the second quarter of 2008, included restructuring, impairments and other costs, net of tax, of $1.0 million, or $0.01 per diluted share, an after tax impact from provisions of SFAS 157 adjustment of $1.1 million, or $0.01 per diluted share and a net tax reduction of $1.0 million due to tax related adjustments.
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Operating Segment Results
Third Party Net Sales, excluding precious metal content
139.6
124.5
15.1
12.1%
105.3
122.0
(16.7)
(13.7%)
156.6
167.5
(10.9)
(6.5%)
110.8
129.2
(18.4)
(14.2%)
42.8
44.8
(2.0)
(4.5%)
4.2
5.6
(1.4)
(25.0%)
45.5
55.1
(9.6)
(17.4%)
24.4
35.1
(10.7)
(30.5%)
Net sales, excluding precious metal content, increased 12.1% during the three months ended June 30, 2009 compared to the three months ended June 30, 2008. On a constant currency basis, sales increased 14.7%. The increase was largely the result of an acquisition completed in 2008, partially offset by currency translation and the timing of the holiday schedule.
Operating income decreased $2.0 million during the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Operating income was negatively affected by currency translation and production volumes. In addition, the decrease was partially attributable to the roll-off of inventory step-up related to an acquisition completed in late 2008.
France, United Kingdom, Italy, CIS, Austria, Central and Eastern Europe, Middle East, Africa, Pacific Rim Businesses
Net sales, excluding precious metal content, decreased 13.7% during the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily as a result of negative currency translation. On a constant currency basis, sales decreased 5.3% primarily related to softer sales in certain emerging markets and the timing of the holiday schedule.
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Operating income decreased $1.4 million during the three months ended June 30, 2009 compared to the three months ended June 30, 2008, driven primarily by lower sales.
Net sales, excluding precious metal content, decreased 6.5% during the three months ended June 30, 2009 compared to the three months ended June 30, 2008, primarily as a result of negative currency translation. On a constant currency basis, sales decreased 1.0% due to lower sales in Canada, Latin America and Endodontics partially offset by growth in Orthodontics. These sales were also negatively impacted by the timing of the holiday schedule.
Operating income decreased $9.6 million during the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease was driven primarily by the negative impact of currency translation and lower sales and production volumes.
Net sales, excluding precious metal content, decreased 14.2% during the three months ended June 30, 2009 compared to the three months ended June 30, 2008, which includes the negative impact of currency translation and negative internal growth, partially offset by the positive impact from acquisitions completed in 2008. On a constant currency basis, sales decreased 6.2% due to a soft economy, significant lower sales in the non-dental business, dealer inventory reductions, softer dental laboratory equipment sales and the timing of the holiday schedule.
Operating income decreased $10.7 million during the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease was driven primarily by lower sales and production volumes and the negative impact of currency translation.
RESULTS OF CONTINUING OPERATIONS, SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO SIX MONTHS ENDED JUNE 30, 2008
The following is a reconciliation of net sales to net sales, excluding precious metal content.
1,060.2
1,155.6
(95.4)
(8.3%)
(82.6)
(117.1)
34.5
(29.5%)
977.6
1,038.5
(60.9)
(5.9%)
Net sales, excluding precious metal content, for the six months ended June 30, 2009, were $977.6 million, 5.9% lower than the prior year. The change in net sales was driven by currency translation, which reduced sales by 6.5%, partially offset by 0.6% growth on a constant currency basis. The constant currency sales growth was comprised of acquisition growth of 4.4%, partially offset by a decrease in internal growth of 3.8%. Excluding the non-dental business, sales grew on a constant currency basis by 1.3%. Excluding the non-dental business, internal growth of negative 3.0% was impacted not only by the softer dental market but also by dealer inventory reductions.
Net sales, excluding precious metal content, decreased 2.4% in the United States on a constant currency basis, including 1.1% acquisition growth and internal growth of negative 3.5%. The lower sales were driven by continued softness in the economy, significant lower sales in the non-dental business, and dealer inventory reductions.
Net sales, excluding precious metal content, in Europe improved by 2.6% on a constant currency basis driven by acquisitions completed in 2008. Internal growth decreased 5.0%, primarily due to the significant decline in the non-dental business and significant sales reductions in Eastern Europe, which was affected by unfavorable foreign exchange movements and customer liquidity constraints partially offset by the dental specialty and dental consumables businesses in the more developed European countries.
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Net sales, excluding precious metal content, in the other regions of the world increased by 2.0% on a constant currency basis. Internal growth decreased 1.9%. The Company experienced positive internal growth in the dental specialty businesses offset by continued softness and some dealer inventory reductions in all other businesses.
553.9
600.7
(46.8)
(7.8%)
52.2%
52.0%
56.7%
57.8%
The 1.1% decrease in gross profit as a percentage of net sales, excluding precious metal content, for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 was due to unfavorable movements in exchange rates, lower production volumes, acquisition related activities, and unfavorable geographic and product mix.
Selling, general and administrative expenses ("SG&A")
364.4
384.9
(20.5)
(5.3%)
34.4%
33.3%
37.3%
SG&A expenses, measured against sales, excluding precious metal content, increased by 0.2% to 37.3%. The Company’s cost containment efforts and the impact of a stronger average U.S. dollar were offset by costs associated with the biennial International Dental Show and recent acquisitions, which generally have a higher SG&A as a percentage of net sales, excluding precious metal content, than our base business.
Restructuring, Impairment and Other Costs, Net
During the six months ended June 30, 2009, the Company recorded restructuring, impairments and other costs of $4.7 million. These costs are related to new and ongoing restructuring plans to reduce operational costs through consolidation of facilities, global headcount reductions and business re-organizations. (See also Note 9, Restructuring, Impairments and Other Costs, to the Unaudited Interim Consolidated Condensed Financial Statements).
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8.0
6.3
0.8
(2.3)
8.8
9.4
(0.6)
The change in net interest expense in 2009 compared to 2008, for the six months ended June 30, was mainly the result of a $1.8 million reduction to net interest expense in 2008 related to the adoption of SFAS 157, “Fair Value Measurements.” Net interest was also impacted in the first half of 2009 from significantly lower Euro interest rates and lower average debt balances combined with stronger U.S. dollar average exchange rates. Interest income decreased $6.4 million from both the SFAS 157 adjustment last year and from the lower interest rates on Euro investment balances, which were 325 basis points lower in the current year than the prior year. In addition, the U.S. dollar was stronger against the Euro. Interest expense decreased $4.7 million on lower average debt and interest rates.
Other expense in the 2009 period included approximately $0.4 million of currency transaction losses and $0.4 million of other non-operating costs. The 2008 period included $2.3 million of currency transaction losses and $0.8 million of other non-operating costs.
25.9%
28.3%
131.9
146.8
(14.9)
(10.1%)
The Company’s effective tax rate for the six months ended June 30, 2009 decreased to 25.9% from 28.3% for the same period in 2008. This decrease primarily relates to the benefits from a European legal entity restructuring that occurred in 2008.
For the period ending June 30, 2009, net income attributable to DENTSPLY International decreased $14.9 million, or negative 10.1%, to $131.9 million. Fully diluted earnings per share were $0.88 in the first half of 2009, a decrease of 8.3% from $0.96 in the first half of 2008. Net income attributable to DENTSPLY International for the first half of 2009 included acquisition related activity, net of tax and non-controlling interest, of $1.6 million or $0.01 per diluted share, restructuring, impairments and other costs, net of tax and non-controlling interest, of $3.2 million or $0.02 per diluted share, a net tax reduction of $0.5 million due to tax related adjustments, and favorable rounding of $0.01. Net income for the first half of 2008, included restructuring, impairments and other costs, net of tax, of $1.0 million or $0.01 per diluted share and an after tax impact from provisions of SFAS 157 adjustment of $1.1 million, or $0.01 per diluted share.
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264.5
245.1
19.4
7.9%
198.4
225.9
(27.5)
(12.2%)
300.6
320.4
(19.8)
(6.2%)
215.2
249.3
(34.1)
76.7
87.9
(11.2)
(12.7%)
6.9
7.6
(0.7)
(9.2%)
95.5
106.3
(10.8)
(10.2%)
46.8
66.8
(20.0)
(29.9%)
Net sales, excluding precious metal content, increased 7.9% during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. On a constant currency basis, sales increased 10.5%, which was driven by acquisition growth partially offset by negative internal growth due to dealer inventory reductions and the negative impact of currency translation.
Operating income decreased $11.2 million during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Operating income was negatively affected by currency translation and production volumes. In addition, the decrease was partially attributable to the roll-off of inventory step-up related to an acquisition completed in late 2008.
Net sales, excluding precious metal content, decreased 12.2% during the six months ended June 30, 2009 compared to the six months ended June 30, 2008, primarily as a result of negative currency translation. On a constant currency basis, sales decreased 3.0% due to dealer inventory reductions and reduced sales in Eastern Europe as a result of unfavorable foreign currency movements and customer liquidity constraints, partially offset by acquisitions and growth in the Pacific Rim businesses.
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Operating income decreased $0.7 million during the six months ended June 30, 2009 compared to the six months ended June 30, 2008, driven primarily by the negative impact of currency translation.
Net sales, excluding precious metal content, decreased 6.2% during the six months ended June 30, 2009 compared to the six months ended June 30, 2008, primarily as a result of currency translation. On a constant currency basis, sales were essentially flat.
Operating income decreased $10.8 million during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease was driven primarily by the negative impact of currency translation and lower sales and production volumes.
Net sales, excluding precious metal content, decreased 13.7% during the six months ended June 30, 2009 compared to the six months ended June 30, 2008, which includes the negative impact of currency translation and negative internal growth, partially offset by the positive impact from acquisitions completed in 2008. On a constant currency basis, sales decreased 5.4% due to the soft economy, significant lower sales in the non-dental business, dealer inventory reductions, softer dental laboratory equipment sales, partially offset by acquisitions completed in 2008.
Operating income decreased $20.0 million during the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease was driven primarily by lower sales and production volumes and the negative impact of currency translation.
CRITICAL ACCOUNTING POLICIES
As discussed in Note 1, Significant Accounting Policies, to the Unaudited Interim Consolidated Condensed Financial Statements, the Company adopted SFAS 141(R) and SFAS 160 on January 1, 2009. In the second quarter of 2009, the Company adopted SFAS 165 and FSP No. FAS 107-1.
There have been no other material changes to the Company’s disclosure in its 2008 Annual Report on Form 10-K/A filed May 1, 2009.
LIQUIDITY AND CAPITAL RESOURCES
Six months ended June 30, 2009
Cash flow from operating activities during the six months ended June 30, 2009 was $115.4 million compared to $139.0 million during the same period of 2008. Net income decreased by $16.3 million to $130.5 million. The working capital impact on cash flow was a slight positive in the first six months of 2009 as compared to the prior year same period. Inventory and accounts receivable balances on a constant currency basis were positive contributors to the change in cash flow, while foreign exchange impacts resulted in higher absolute dollar balances and reported days in each category. Reductions in accounts payable and accruals largely offset the improvements from inventory.
Investing activities during the first six months of 2009 include capital expenditures of $25.0 million.
At June 30, 2009, the Company had authorization to maintain up to 17,000,000 shares of treasury stock under the stock repurchase program as approved by the Board of Directors. Under this program, the Company purchased 377,101 shares for $9.8 million during the first six months of 2009 at an average price of $25.93. As of June 30, 2009, the Company held 14.2 million shares of treasury stock. The Company also received proceeds of $5.9 million as a result of the exercise of 459,048 stock options during the six months ended June 30, 2009.
The Company’s long-term borrowings decreased by a net of $31.3 million during the six months ended June 30, 2009. This change included net repayments of $19.8 million during the first six months and a decrease of $11.5 million due to exchange rate fluctuations on debt denominated in foreign currencies. At June 30, 2009, the Company’s ratio of long-term debt to total capitalization decreased to 7.8% compared to 21.2% at December 31, 2008. Also in that same period, the Company’s cash, cash equivalents and short-term investments have increased from $204.2 million to $251.9 million.
Under its multi-currency revolving credit agreement, the Company is able to borrow up to $500 million through May 2010. This facility is unsecured and contains certain affirmative and negative covenants relating to its operations and financial condition. The most restrictive of these covenants pertain to asset dispositions and prescribed ratios of indebtedness to total capital and operating income plus depreciation and amortization to interest expense. At June 30, 2009, the Company was in
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compliance with these covenants. The Company also has available an aggregate $250 million under a US dollar commercial paper facility. The multi-currency revolving credit facility serves as a back-up to the commercial paper facility. The total available credit under the commercial paper facility and the multi-currency facility in the aggregate is $500 million with $59.9 million outstanding under the multi-currency facility and $36.6 million outstanding under the commercial paper facilities at June 30, 2009.
The Company’s debt instruments that are supported by the multi-currency revolving credit facility and a private placement note have been re-classified as current until the Company replaces the May 2010 maturing facility. Management’s intent is to replace the maturing facility, at least in part, by the end of this fiscal year.
The Company also has access to $67.8 million in uncommitted short-term financing under lines of credit from various financial institutions. The lines of credit have no major restrictions and are provided under demand notes between the Company and the lending institutions. At June 30, 2009, $23.5 million is outstanding under these short-term lines of credit. At June 30, 2009, the Company had total unused lines of credit related to the revolving credit agreement and the uncommitted short-term lines of credit of $447.8 million.
At June 30, 2009, the Company held $88.2 million of precious metals on consignment from several financial institutions. These consignment agreements allow the Company to acquire the precious metal at market rates at a point in time, which is approximately the same time and for the same price as alloys are sold to the Company’s customers. In the event that the financial institutions would discontinue offering these consignment arrangements, and if the Company could not obtain other comparable arrangements, the Company may be required to obtain third party financing to fund an ownership position in the required precious metal inventory levels.
There have been no other material changes to the Company’s scheduled contractual cash obligations disclosed in its 2008 Annual Report on Form 10-K/A filed May 1, 2009. The Company expects on an ongoing basis, to be able to finance cash requirements, including capital expenditures, stock repurchases, debt service, operating leases and potential future acquisitions, from the funds generated from operations and amounts available under its existing credit facilities.
NEW ACCOUNTING PRONOUNCEMENTS
On December 31, 2008, the FASB issued FASB Staff Position No. SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets,” which amends SFAS 132(R) by providing guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The FSP is effective for fiscal years ending after December 15, 2009 with early application permitted. Upon initial application, the provisions of this staff position are not required for earlier periods that are presented for comparative periods. The Company is currently evaluating the impact of adopting this staff position on its disclosures.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166 (“SFAS 166”), “Accounting for Transfers of Financial Assets,” which is an amendment to SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 166 is effective for fiscal years beginning after November 15, 2009 and must be applied prospectively to new transfers of financial assets. The new standard eliminates the use of qualified special purpose entities, clarifies the derecognition criteria for a transfer accounted for as a sale, and expands the disclosure requirements among other things. The Company is currently evaluating the impact of adopting the new standard.
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167 (“SFAS 167”), “Amendments to FASB Interpretation No. 46 (R).” SFAS 167 is effective for annual reporting periods that begin after November 15, 2009 and applies to all existing and new variable interest entities. The new standard significantly changes the consolidation model for variable interest entities. The Company is currently evaluating the impact of adopting the new standard.
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no significant material changes to the market risks as disclosed in the Company’s Annual Report on Form 10-K/A filed for the year ending December 31, 2008.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended) as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that it is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal controls over financial reporting that occurred during the six months ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
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Item 1A – Risk Factors
There have been no significant material changes to the risks factors as disclosed in the Company’s Annual Report on Form 10-K/A filed for the year ending December 31, 2008.
At June 30, 2009, the Company had authorization to maintain up to 17,000,000 shares of treasury stock under the stock repurchase program as approved by the Board of Directors. During the quarter ended June 30, 2009, the Company had the following activity with respect to this repurchase program:
Number of
Shares that
May be Purchased
Total Number
Average Price
Total Cost
Under the Share
of Shares
Paid Per
Repurchase
Period
Purchased
Share
Program
April 1-30, 2009
2,744.7
May 1-31, 2009
100.0
28.91
2,891.2
2,835.0
June 1-30, 2009
77.1
28.84
2,223.5
2,833.6
177.1
28.88
5,114.7
Item 4 - Submission of Matters to Vote of Security Holders
(a)
On May 12, 2009, the Company held its 2009 Annual Meeting of Shareholders.
(b)
The following matters were voted upon at the Annual Meeting, with the results indicated:
1.
Election of Class II Directors:
Nominee
Votes For
Votes Withheld
Wendy L. Dixon, Ph.D.
128,523.375
730,409
Leslie A. Jones
128,161,782
1,092,002
Bret W. Wise
126,522,589
2,731,195
2.
Proposal to ratify the appointment of PricewaterhouseCoopers LLP, independent registered public accounting firm, to audit the financial statements of the Company and to audit the Company’s internal control over financial reporting for the year ending December 31, 2009:
Votes For:
128,751,192
Votes Against:
437,892
Abstentions:
64,700
31
Section 302 Certification Statements.
32
Section 906 Certification Statement.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/
July 30, 2009
Date
Chairman of the Board and
Chief Executive Officer
William R. Jellison
Senior Vice President and
Chief Financial Officer
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