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 March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16211
DENTSPLY International Inc.
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(Exact name of registrant as specified in its charter)
Delaware 39-1434669
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(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
570 West College Avenue, P. O. Box 872, York, PA 17405-0872
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(Address of principal executive offices) (Zip Code)
(717) 845-7511
(Registrant's telephone number, including area code)
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.
( X ) Yes ( ) No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At May 5, 2001 the Company had
51,753,711 shares of Common Stock outstanding, with a par value of $.01 per
share.
Page 1 of 18
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended March 31, 2001
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
Notes to Unaudited Consolidated Condensed
Financial
Statements................................................. 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 13
Item 3 - Quantitative and Qualitative Disclosures
About Market
Risk....................................................... 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................... 17
Item 6 - Exhibits and Reports on Form 8-K..................... 17
Signatures....................................................... 18
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended March 31,
2001 2000
(in thousands, except per share amounts)
Net sales $ 245,669 $ 213,956
Cost of products sold 115,855 103,481
Gross profit 129,814 110,475
Selling, general and administrative expenses 89,393 73,735
Restructuring costs (Note 6) 5,500 --
Operating income 34,921 36,740
Other income and expenses:
Interest expense 3,581 3,000
Interest income (244) (389)
Other (income) expense, net (22,832) 23
Income before income taxes 54,416 34,106
Provision for income taxes 20,090 11,913
Net income $ 34,326 $ 22,193
Earnings per common share (Note 3):
Basic $ 0.66 $ 0.42
Diluted 0.66 0.42
Cash dividends declared per common share $ 0.06875 $ 0.06250
Weighted average common shares outstanding:
Basic 51,642 52,315
Diluted 52,327 52,536
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
March 31, December 31,
2001 2000
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 15,338 $ 15,433
Accounts and notes receivable-trade, net 136,358 133,643
Inventories, net (Notes 1 and 5) 143,003 133,304
Prepaid expenses and other current assets 44,236 43,074
Total Current Assets 338,935 325,454
Property, plant and equipment, net 185,337 181,341
Identifiable intangible assets, net 167,157 80,730
Costs in excess of fair value of net
assets acquired, net 335,681 264,023
Other noncurrent assets 48,697 15,067
Total Assets $ 1,075,807 $ 866,615
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 47,332 $ 45,764
Accrued liabilities 96,331 88,058
Income taxes payable 40,462 33,522
Notes payable and current portion
of long-term debt 1,296 794
Total Current Liabilities 185,421 168,138
Long-term debt 272,330 109,500
Deferred income taxes 30,871 16,820
Other noncurrent liabilities 46,248 47,226
Total Liabilities 534,870 341,684
Minority interests in consolidated subsidiaries 4,436 4,561
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $.01 par value; .25 million
shares authorized; no shares issued -- --
Common stock, $.01 par value; 100 million
shares authorized; 54.3 million shares
issued at March 31, 2001 and
December 31, 2000 543 543
Capital in excess of par value 152,305 151,899
Retained earnings 520,940 490,167
Accumulated other comprehensive loss (66,150) (49,296)
Unearned ESOP compensation (4,521) (4,938)
Treasury stock, at cost, 2.6 million shares
at March 31, 2001 and December 31, 2000 (66,616) (68,005)
Total Stockholders' Equity 536,501 520,370
Total Liabilities and Stockholders' Equity $ 1,075,807 $ 866,615
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
4
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
-------------------------------
2001 2000
(in thousands)
Cash flows from operating activities:
Net income $ 34,326 $ 22,193
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 6,410 5,925
Amortization 6,285 4,811
Restructuring and other costs 5,500 --
Gain on sale of business (23,121) --
Other, net 17,858 8,214
Net cash provided by operating activities 47,258 41,143
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (201,164) --
Capital expenditures (8,284) (7,018)
Other, net (1,692) (528)
Net cash used in investing activities (211,140) (7,546)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs 197,115 75,907
Payments on long-term borrowings (33,707) (86,787)
Decrease in short-term borrowings (3,737) (1,506)
Cash paid for treasury stock (875) (19,973)
Cash dividends paid (3,548) (3,295)
Other, net 2,247 554
Net cash provided by (used in) financing activities 157,495 (35,100)
Effect of exchange rate changes on cash and cash equivalents 6,292 1,525
Net (decrease) increase in cash and cash equivalents (95) 22
Cash and cash equivalents at beginning of period 15,433 7,276
Cash and cash equivalents at end of period $ 15,338 $ 7,298
<FN>
See accompanying notes to unaudited consolidated financial statements.
</FN>
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2001
The accompanying unaudited interim consolidated condensed financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) which in the opinion of management are necessary for a fair
statement of financial position, results of operations and cash flows for the
interim periods. These interim financial statements conform to the requirements
for interim financial statements and consequently do not include all the
disclosures normally required by generally accepted accounting principles.
Disclosures included in the Company's most recent Form 10-K filed March 20, 2001
are updated where appropriate.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated condensed financial statements include the accounts of
DENTSPLY International Inc. (the "Company") and its subsidiaries.
Inventories
Inventories are stated at the lower of cost or market. At both March 31, 2001
and December 31, 2000, the cost of $14.0 million or 10% 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
method.
Pre-tax income was $0.2 million lower in the three months ended March 31,
2001 and $0.1 million lower for the same period in 2000 as a result of using the
LIFO method compared to the first-in, first-out (FIFO) method. If the FIFO
method had been used to determine the cost of the LIFO inventories, the amounts
at which net inventories are stated would be higher than reported at March 31,
2001 and December 31, 2000 by $0.1 million and $0.2 million, respectively.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended March 31,
2001 2000
(in thousands)
Net income $ 34,326 $ 22,193
Foreign currency translation adjustments (14,880) (4,274)
Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133) (503) --
Net loss on derivative financial
instruments (1,471) --
Total comprehensive income $ 17,472 $ 17,919
6
The balances included in accumulated other comprehensive loss in the
consolidated balance sheets are as follows:
March 31, December 31,
2001 2000
(in thousands)
Foreign currency translation adjustments $ (63,505) $ (48,625)
Net loss on derivative financial
instruments (1,974) --
Minimum pension liability (671) (671)
$ (66,150) $ (49,296)
NOTE 3 - EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
per common share:
Three Months Ended
March 31,
2001 2000
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $ 34,326 $ 22,193
Denominator:
Common shares outstanding 51,642 52,315
Basic EPS $ 0.66 $ 0.42
Diluted EPS Computation
Numerator (Income) $ 34,326 $ 22,193
Denominator:
Common shares outstanding 51,642 52,315
Incremental shares from assumed exercise
of dilutive options 685 221
Total shares 52,327 52,536
Diluted EPS $ 0.66 $ 0.42
Options to purchase 0.8 million and 0.7 million shares of common stock that
were outstanding during the periods ended March 31, 2001 and 2000, 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.
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
In November 2000, the Company entered into an agreement in principle whereby
it was to acquire all of the issued and outstanding shares of Pro-Dex, Inc.
("Pro-Dex"). This agreement was based on the exchange of .091 shares of DENTSPLY
for each share of Pro-Dex, and was subject to due diligence by the parties,
regulatory approval, approval by Pro-Dex shareholders and DENTSPLY's Board of
Directors, completion of a definitive agreement, and other customary closing
conditions. In April 2001, the Company made a determination not to proceed with
the transaction.
7
In December 2000, the Company agreed to acquire all the outstanding shares of
Friadent GmbH ("Friadent") for 220 million German marks or $106 million ($104.7,
net of cash acquired). The acquisition closed in January 2001. Headquartered in
Mannheim, Germany, Friadent is a major global dental implant manufacturer and
marketer with subsidiaries in Germany, France, Denmark, Sweden, the United
States, Switzerland, Brazil, and Belgium.
In December 2000, the Company agreed to sell InfoSoft, LLC to PracticeWorks,
Inc. InfoSoft, LLC, a wholly owned subsidiary of the Company, develops and sells
software and related products for dental practice management. PracticeWorks is
the dental software management and dental claims processing company which is
being spun-off by Infocure Corporation (NASDAQ-INCX). The transaction closed in
March 2001. In the transaction, the Company received 6.5% convertible preferred
stock in PracticeWorks, with a fair value of $32 million, which is included in
"Other noncurrent assets" on the balance sheet. These preferred shares are
convertible into 9.8% of PracticeWorks common stock. If not previously
converted, the preferred shares are redeemable for cash after 5 years. This sale
has resulted in a $23.1 million pretax gain. The Company will measure
recoverability on this investment on a periodic basis.
In January 2001, the Company agreed to acquire the dental injectible
anesthetic assets of AstraZeneca ("AZ"), including licensing rights to the
dental trademarks, for $136.5 million and royalties on future sales of a new
anesthetic product for scaling and root planing (Oraqix(TM)) that is currently
in Stage III clinical trials. The $136.5 million purchase price is composed of
the following: an initial $96.5 million payment which was made at closing in
March 2001; a $20 million contingency payment associated with sales of
injectible dental anesthetic; a $10 million milestone payment upon submission of
an Oraqix New Drug Application (NDA) in the U.S., and Marketing Authorization
Application (MAA) in Europe; and a $10 million milestone payment upon approval
of the NDA and MAA.
In August 1996, the Company purchased a 51% interest in CeraMed Dental
("CeraMed") for $5 million with the right to acquire the remaining 49% interest.
In March 2001, the Company entered into an agreement for an early buy out of the
remaining 49% interest in CeraMed at a cost of $20 million with a potential
contingent consideration ("earn-out") provision capped at $5 million. The
acquisition of the remaining 49% will be made on July 1, 2001. The earn-out is
based on future sales of CeraMed products during the August 1, 2001 to July 31,
2002 time frame with any additional pay out due on September 30, 2002.
Certain assets of Tulsa Dental Products LLC were purchased in January 1996
for $75.1 million, plus $5.0 million paid in May 1999 related to earn-out
provisions in the purchase agreement based on performance of the acquired
business. The purchase agreement provides for an additional earn-out payment
based upon the operating performance of the Tulsa Dental business for one of the
three two-year periods ending December 31, 2000, December 31, 2001 or December
31, 2002, as selected by the seller. The Company expects that the final earn-out
payment, estimated at approximately $85 million, will be paid and recognized in
the second quarter of 2001.
The acquisitions above were accounted for under the purchase method of
accounting; accordingly, the results of their operations are included in the
accompanying financial statements since the respective dates of the
acquisitions. The purchase prices plus direct acquisition costs have been
allocated on the basis of estimated fair values at the dates of acquisition,
pending final determination of the fair value of certain acquired assets and
liabilities. The preliminary purchase price allocations for Friadent and AZ are
as follows:
Friadent AZ
Current assets $ 17,872 $ --
Property, plant and equipment 3,872 6,525
Identifiable intangible assets and costs in excess of
fair value of net assets acquired 94,403 89,975
Other long-term assets 771 --
Current liabilities (12,254) --
$ 104,664 $ 96,500
The acquisitions of Friadent and AZ were finalized in the first quarter of
2001. As neither Friadent nor AZ were previously required to prepare quarterly
financial information, such information is not readily available. The Company is
in the process of compiling such data to permit the preparation of pro forma
disclosures.
8
NOTE 5 - INVENTORIES
Inventories consist of the following:
March 31, December 31,
2001 2000
(in thousands)
Finished goods $ 92,335 $ 84,436
Work-in-process 25,641 22,102
Raw materials and supplies 25,027 26,766
$ 143,003 $ 133,304
NOTE 6 - RESTRUCTURING AND OTHER COSTS
In the first quarter of 2001, the Company recorded a pre-tax charge of $5.5
million related to reorganizing certain functions within Europe, Brazil and
North America. The primary objectives of this reorganization were to consolidate
duplicative functions and to improve efficiencies within these regions and are
expected to contribute to future earnings. Included in this charge were
severance costs of $3.1 million and other costs of $2.4 million. The
restructuring plan will result in the elimination of approximately 330
administrative and manufacturing positions in Brazil and Germany. The Company
anticipates that most aspects of this plan will be completed, and the benefits
of the restructuring will begin to be realized, by the first quarter of 2002.
The major components of this restructuring charge and the remaining outstanding
balances are as follows:
Amounts
Applied Balance
2001 During March 31,
Provision 2001 2001
(in thousands)
Severance $3,130 $ -- $3,130
Other costs 2,370 -- 2,370
$5,500 $ -- $5,500
In the fourth quarter of 2000, the Company recorded a pre-tax charge of $2.7
million related to the reorganization of its French and Latin American
businesses. The primary focus of the reorganization is consolidation of
operations in these regions in order to eliminate duplicative functions. The
Company anticipates that this plan will increase operational efficiencies and
contribute to future earnings. Included in this charge were severance costs of
$2.3 million and other costs of $0.4 million. The restructuring will result in
the elimination of approximately 40 administrative positions, mainly in France.
Approximately 30 of these positions remain to be eliminated. The Company
anticipates that most aspects of this plan will be completed, and the benefits
of the restructuring will begin to be realized, by the end of 2001. The major
components of this restructuring charge and the remaining outstanding balances
are as follows:
Amounts Amounts
Applied Applied Balance
2000 During During March 31,
Provision 2000 2001 2001
(in thousands)
Severance $ 2,299 $ (611) $ (173) $ 1,515
Other costs 403 -- (50) 353
$ 2,702 $ (611) $ (223) $ 1,868
9
NOTE 7 - DERIVATIVES
Adoption of SFAS 133
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," was issued by the Financial
Accounting Standards Board (FASB) in June 1998. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires recognition of all derivatives as either assets or liabilities on
the balance sheet and measurement of those instruments at fair value. This
statement, as amended, was adopted effective January 1, 2001, and as required,
the Company recognized a cumulative adjustment for the change in accounting
principle. This adjustment increased other current liabilities by $1.1 million
and resulted in a cumulative loss, reflected in current earnings of $0.3 million
($0.2 million, net of tax), and a reduction in other comprehensive income of
$0.8 million ($0.5 million, net of tax). The cumulative loss on adoption of SFAS
133 recognized in the income statement was recorded in "Other (income) expense,
net" and was considered immaterial for presentation as a cumulative effect of a
change in accounting principle.
Derivative Instuments 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 potentially adverse effects that these market risks may have on the
Company's operating results.
A portion of the Company's borrowings and certain inventory purchases are
denominated in foreign currencies which exposes 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 creates exposures to changes in exchange rates. The Company
uses non-U.S. dollar -denominated-debt as a means of hedging some of this risk.
Substantially all of the Company's long-term debt is variable-rate, which
exposes the Company to earnings fluctuations from changing interest rates. In
order to adjust these interest rate exposures, the Company's policy is to manage
interest rates through the use of interest rate swaps when appropriate, based
upon market conditions.
The manufacturing of some of the Company's products requires a significant
volume of commodities with potentially volatile prices. In order to limit the
unanticipated earnings fluctuations from such volatility in commodity prices,
the Company selectively enters into commodity price swaps to convert variable
raw material costs to fixed costs.
Cash Flow Hedges
The Company enters into forward exchange contracts to hedge the foreign
currency exposure of its anticipated purchases of certain inventory from Japan.
The forward contracts that are used in this program mature in twelve months or
less. The Company generally hedges between 33% and 67% of its anticipated
purchases.
The Company uses interest rate swaps to convert a portion of its
variable-rate debt to fixed-rate debt. In January 2000, the Company entered into
an interest rate swap agreement with notional amounts totaling 50 million Swiss
francs which converts a portion of the Company's variable rate Swiss franc
financing to a fixed rate of 3.4% for a period of three years. In February 2001,
the Company entered into interest rate swap agreements with notional amounts
totaling 130 million Swiss francs which converts a portion of the Company's
variable rate financing to an average fixed rate of 3.3% for an average period
of four years.
The Company selectively enters into commodity price swaps to convert variable
raw material costs to fixed. In August 2000, the Company entered into a
commodity price swap agreement with notional amounts totaling 270,000 troy
ounces of silver bullion throughout calendar year 2001. The average fixed rate
of this agreement is $5.10 per troy ounce. The Company generally hedges between
33% and 67% of its projected annual silver needs.
10
For the period ended March 31, 2001, the Company recognized a net loss of
$0.4 million in "Other expense (income), net" of the income statement, which
represented the total ineffectiveness of all cash flow hedges.
As of March 31, 2001, $1.0 million of deferred net losses on derivative
instruments accumulated in other comprehensive income are expected to be
reclassified to current earnings during the next twelve months. Transactions and
events that are expected to occur over the next twelve months that will
necessitate such a reclassification include: the sale of inventory that includes
previously hedged purchases made in Japanese yen; the sale of inventory that
includes previously hedged purchases of silver; and amortization of a portion of
the net deferred loss on interest rate swaps terminated as part of a swap
restructuring in February 2001, which is being amortized over the remaining term
of the underlying loan being hedged. 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.
Hedges of Net Investments in Foreign Operations
The Company has numerous investments in foreign subsidiaries. The net assets
of these subsidiaries are exposed to the volatility in currency exchange rates.
Currently, the Company uses nonderivative financial instruments (at the parent
company level) to hedge some of this exposure. The translation gains and losses
related to the net assets of the foreign subsidiaries are offset by gains and
losses in the parent company's debt obligations. At March 31, 2001, the Company
had Swiss franc-denominated debt (at the parent company level) to hedge the
currency exposure related to the net assets of its Swiss subsidiaries.
For the period ended March 31, 2001, $5.1 million of net gains related to the
Swiss franc-denominated debt were included in the Company's cumulative
translation adjustment.
Other
As of March 31, 2001, the Company had recorded the fair value of derivative
instrument liabilities of $0.5 million in "Accrued liabilities" and $0.7 million
in "Other noncurrent liabilities" on the balance sheet.
In accordance with SFAS 52, "Foreign Currency Translation", the Company
utilizes long-term intercompany loans to eliminate foreign currency transaction
exposures of certain foreign subsidiaries. For the period ended March 31, 2001
$1.8 million of net losses related to the long-term intercompany loans, those
for which settlement is not planned or anticipated in the foreseeable future,
were included in the Company's cumulative translation adjustment.
11
NOTE 8 - COMMITMENTS AND CONTINGENCIES
DENTSPLY and its subsidiaries are from time to time parties to lawsuits
arising out of their respective operations. The Company believes that pending
litigation to which DENTSPLY is a party will not have a material adverse effect
upon its consolidated financial position or results of operations or liquidity.
In June 1995, the Antitrust Division of the United States Department of
Justice initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. 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
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. Three follow on private class action suits on behalf of dentists,
laboratories and denture patients in seventeen states, respectively, who
purchased Trubyte teeth or products containing Trubyte teeth were filed and
transferred to the U.S. District Court in Wilmington, Delaware. These cases have
been assigned to the same judge who is handling the Department of Justice
action. The class action filed on behalf of the dentists has been dismissed by
the plaintiffs. The private party suits seek damages in an unspecified amount.
The Company filed motions for summary judgment in all of the above cases which
motions were argued December 8, 2000. In March the Court issued a decision on
Dentsply's Motions. The Court denied the Motion for Summary Judgment regarding
the Department of Justice action, granted the Motion on the lack of standing of
the patient class action and granted the Motion on lack of standing of the
laboratory class action to pursue damage claims. These decisions mean that the
Department of Justice case will proceed, the patient class action is dismissed
and the laboratory class action cannot pursue damage claims in the current
litigation. Since that time, in an attempt to avoid the effect of the Court's
ruling, the attorneys for the laboratory class action have filed a new complaint
naming Dentsply and its dealers as co-conspirators with respect to Dentsply's
distribution policy. Four private party class actions on behalf of indirect
purchasers have been filed in California. These cases are based on allegations
similar to those in the Department of Justice case. In response to the Company's
motion, these cases have been consolidated in one Judicial District in Los
Angeles. It is the Company's position that the conduct and activities of the
Trubyte Division do not violate the antitrust laws.
NOTE 9 - OTHER EVENTS
On January 25, 2001, a fire broke out in one of the Company's Swiss
manufacturing facilities. The fire caused severe damage to a building and to
most of the equipment it contained. The Company is in the process of assessing
all the damages and potential losses related to this fire and has filed several
insurance claims, including a claim under its business interruption policy. The
claims process is lengthy and its outcome cannot be predicted with certainty;
however, the Company anticipates that all or most of the financial loss incurred
from this fire will be recovered under its various insurance policies.
12
DENTSPLY INTERNATIONAL INC.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Certain statements made by the Company, including without limitation, statements
containing the words "plans", "anticipates", "believes", "expects", or words of
similar import constitute forward-looking statements which are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. 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 set forth in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
RESULTS OF OPERATIONS
Quarter Ended March 31, 2001 Compared to Quarter Ended March 31, 2000
For the quarter ended March 31, 2001, net sales increased $31.7 million, or
14.8%, to $245.7 million, up from $214.0 million in the same period of 2000.
Base business sales (internal sales growth exclusive of acquisitions/divestiture
and the impact of currency translation) grew 7.1%. The impact of currency
translation had a negative effect of 2.2% on the first quarter results compared
to the comparable period in 2000 due to the further strengthening of the U.S.
dollar against the major European currencies while acquisitions in 2001, net of
divestiture, had a positive 9.9% impact on net sales growth.
Sales in the United States for the first quarter grew 11.5%. Base business sales
growth in the U.S., up 8.6%, was achieved across both consumable and equipment
lines. Notable growth was achieved in endodontic, orthodontic, intraoral cameras
and digital x-ray systems. Acquisitions, net of divestiture, added 2.9% to net
sales in the U.S. during the first quarter.
European base business sales, including the Commonwealth of Independent States,
increased 19.2% during the first quarter of 2001. European base business sales
increased 4.3%. Currency translation had a negative 4.2% effect on the quarter.
Acquisitions added 19.1% to European sales during the quarter. Large equipment
base business in Europe grew 23.2%, reflecting the continued strong demand for
our digital x-ray and intraoral cameras. Consumable and small equipment base
business sales in Europe grew 2.4%.
Asia (excluding Japan) base business sales increased 16.5% as the Asian dental
markets remained firm. The impact of currency translation was negative 5.5% for
the first quarter in Asia. Acquisitions added an additional 10.2% to Asia's net
sales for the quarter.
Latin American base business sales increased 1.1% during the first quarter,
2001. The first quarter of 2000 included the shipment of late 1999 annual orders
for endodontic school kits while the fourth quarter of 2000 reflected more
normal ordering and shipping patterns of the school kit orders. The fundamental
Latin American business remained strong for the quarter. Latin American sales
increased 2.4% from acquisitions less 6.6% for the impact of currency
translation.
Sales in the rest of the world (including Japan) grew 34.4%: 6.4% from base
business sales primarily in the Middle East/Africa and Australia; less 5.4% from
the impact of currency translation. Acquisitions added 33.4% to net sales for
the remaining territories of the world including a large tender to the Middle
East.
Consumable and small equipment sales grew 16.1%: 6.3% from base business sales;
12.0% from acquisitions; less 2.2% from the impact of currency translation.
Large equipment base business sales increased 18.4%. This increase was offset
somewhat by a negative 3.1% from currency translation during the quarter.
Gross profit grew $19.3 million or 17.5% in the first quarter due to higher
sales. The first quarter 2001 gross profit percentage of 52.8% was higher than
the 51.6% gross profit percentage for the first quarter of 2000. Gross profit
margins in the first quarter of 2001 benefited from restructuring and
operational improvements and a favorable product mix offset somewhat by the
negative impact of a strong U.S. dollar in 2001.
13
Selling, general and administrative (SG&A) expenses increased $15.7 million, or
21.2%. As a percentage of sales, expenses increased from 34.5% in the first
quarter of 2000 to 36.4% for the same period of 2001. The increased SG&A
spending includes $10.7 million for acquisitions subsequent to March 31, 2000
and additional sales and marketing expenses including the North American sales
conference held in February, 2001 which brought together 700 Dentsply field
sales people at one venue.
The first quarter of 2001 included a $5.5 million pre-tax charge ($3.8 million
after-tax) for improving efficiencies in Europe, Brazil, and North America.
Net interest expense increased $0.7 million in the first quarter of 2001 due to
higher debt levels in 2001 to finance the Friadent and AstraZeneca acquisitions
offset somewhat by savings in interest expense resulting from further
utilization of lower rate Swiss debt in the first quarter of 2001.
Other income increased $22.8 million including $23.1 million recorded in the
first quarter of 2001 for the pre-tax gain on the sale of SoftDent, LLC
(formerly the InfoSoft Division).
Income before income taxes increased $20.3 million, or 59.5% to $54.4 million
from $34.1 million in the first quarter of 2000. The effective tax rate for
operations was lowered to 33.5% in the first quarter of 2001 compared to 34.9%
in the first quarter of 2000 reflecting savings from federal, state and foreign
tax planning activities. The gain on the sale of SoftDent, LLC and the
restructuring charge were taxed at higher rates, raising the effective tax rate
to 36.9% for the first quarter of 2001.
Net income increased $12.1 million, or 54.7%, from the first quarter of 2000
including a $13.6 million after tax net gain on the sale of SoftDent, LLC and
the $3.8 million after tax net charge for restructuring recorded in the first
quarter of 2001. Without the restructuring charge and the gain on the sale of
SoftDent, LLC, net income was a record $24.5 million, up 10.4% from the first
quarter of 2000. Basic and diluted earnings per common share increased from $.42
in 2000 to $.66 in 2001, or 57.1%. Without the restructuring charge and the gain
on the sale of SoftDent, LLC, basic and diluted earnings per common share
increased from $.42 in 2000 to $.47 in 2001, or 11.9%, due to higher sales,
higher gross profit margin, and a lower income tax rate in the first quarter of
2001.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2001, cash flows from operating activities
were $47.3 million compared to $41.1 million for the three months ended March
31, 2000. The increase of $6.2 million results primarily from higher earnings,
increases in accrued liabilities and deferred income taxes offset by increases
in inventories and accounts receivables.
Investing activities for the three months ended March 31, 2001 include capital
expenditures of $8.3 million.
In December 2000, the Board of Directors authorized a stock buyback program for
2001 to purchase up to 1.0 million shares of common stock on the open market or
in negotiated transactions. During the first quarter of 2001, the Company
repurchased 25,000 shares of its common stock for $0.9 million. The timing and
amounts of any additional purchases will depend upon many factors, including
market conditions, the Company's business and financial condition and
acquisition outlook.
The Company's current ratio was 1.8 with working capital of $153.5 million at
March 31, 2001. This compares with a current ratio of 1.9 and working capital of
$157.3 million at December 31, 2000.
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The Company had acquisition activity during the period ended March 31, 2001 that
resulted in significant cash outlays. In January 2001, the Company completed the
acquisition of Friadent GmbH ("Friadent") for 220 million German marks or $106
million ($104.7, net of cash acquired). In March 2001, the Company completed the
acquisition of the dental injectible anesthetic assets of AstraZeneca ("AZ"),
including licensing rights to the dental trademarks, for $96.5 million, with
potential additional payments of $40 million to be made in the future.
Additionally, in March 2001, the Company entered into an agreement for an early
buy out of the remaining 49% interest in CeraMed Dental at a cost of $20 million
with a potential earn-out provision capped at $5 million. The $20 million
payment will be made on July 1, 2001 and the earn-out is based on future sales.
The Company also expects to make an earn-out payment of approximately $85
million related to its 1996 purchase of Tulsa Dental Products LLC. The earn-out
is based on provisions in the purchase agreement related to the operating
performance of the acquired business. The Company expects that the earn-out
payment will be paid and recognized in the second quarter of 2001 and will have
an annualized earnings impact of approximately $0.11 per share, comprised of
approximately $0.05 related to goodwill amortization and approximately $0.06 for
incremental borrowing costs. These transactions are discussed in Note 3 of the
Notes to the Financial Statements.
In order to fund these transactions, the Company completed a $100 million five
year average life private placement of debt, denominated in Swiss francs at an
average interest rate of 4.5% with a major insurance company in March of 2001.
The Company also plans on renewing and expanding its revolving credit agreements
to approximately $500 million from its current level of $300 million by the end
of the second quarter of 2001. In addition to funding the above transactions,
these new facilities will also provide the Company with resources to potentially
support future opportunities as they arise.
The Company's long-term debt increased $162.8 million from December 31, 2000 to
$272.3 million due to the acquisition activity. The resulting long-term debt to
total capitalization at March 31, 2001 was 33.7% compared to 17.4% at December
31, 2000. The Company expects on an ongoing basis, to be able to finance cash
requirements, including capital expenditures, stock repurchases, debt service,
and potential future acquisitions, from the funds generated from operations and
amounts available under the existing bank revolving loan and commercial paper
facilities.
NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities," was issued by the Financial
Accounting Standards Board (FASB) in June 1998. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires recognition of all derivatives as either assets or liabilities on
the balance sheet and measurement of those instruments at fair value. This
statement, as amended, was adopted effective January 1, 2001, and as required,
the Company recognized a cumulative adjustment for the change in accounting
principle. This adjustment increased other current liabilities by $1.1 million
and resulted in a cumulative loss, reflected in current earnings of $0.3 million
($0.2 million, net of tax), and a reduction in other comprehensive income of
$0.8 million ($0.5 million, net of tax). The Company does not expect this
statement to have a significant impact on future net income as its derivative
instruments are held primarily for hedging purposes, and the Company considers
the resulting hedges to be highly effective under SFAS 133.
In September 1999, FASB issued, and then revised in February 2001, an Exposure
Draft on a Proposed Statement related to Business Combinations and Intangible
Assets. The proposal focuses on the accounting for goodwill and other purchased
intangible assets and the fundamental issues related to the methods of
accounting for business combinations. The primary proposals of this Exposure
Draft include eliminating the use of the pooling method of accounting and
discontinuing the amortization of goodwill and instead applying a periodic
impairment approach. If finalized in its current form, this Exposure Draft would
be applied immediately upon its effective date and could have a material impact
on the Company's results of operations. Goodwill amortization reduced earnings
per share by approximately $0.15 in 2000 and is projected to reduce earnings per
share by approximately $0.20-$0.25 in 2001 under the current accounting rules.
15
EURO CURRENCY CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European Union
(the "participating countries") established fixed conversion rates between their
legacy currencies and the newly established Euro currency.
The legacy currencies will remain legal tender in the participating countries
between January 1, 1999 and January 1, 2002 (the "transition period"). Starting
January 1, 2002 the European Central Bank will issue Euro-denominated bills and
coins for use in cash transactions. On or before July 1, 2002, the legacy
currencies of participating countries will no longer be legal tender for any
transactions.
The Company's various operating units which are affected by the Euro conversion
have adopted the Euro as the functional currency effective January 1, 2001. At
this time, the Company does not expect the reasonably foreseeable consequences
of the Euro conversion to have material adverse effects on the Company's
business, operations or financial condition.
IMPACT OF INFLATION
The Company has generally offset the impact of inflation on wages and the cost
of purchased materials by reducing operating costs and increasing selling prices
to the extent permitted by market conditions.
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 filed for the year ending December
31, 2000.
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PART II
OTHER INFORMATION
Item 1 - Legal Proceedings
DENTSPLY and its subsidiaries are from time to time parties to lawsuits arising
out of their respective operations. The Company believes that pending litigation
to which DENTSPLY is a party will not have a material adverse effect upon its
consolidated financial position or results of operations or liquidity.
In June 1995, the Antitrust Division of the United States Department of Justice
initiated an antitrust investigation regarding the policies and conduct
undertaken by the Company's Trubyte Division with respect to the distribution of
artificial teeth and related products. 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
violate the antitrust laws and seeking an order for the Company to discontinue
its practices. Three follow on private class action suits on behalf of dentists,
laboratories and denture patients in seventeen states, respectively, who
purchased Trubyte teeth or products containing Trubyte teeth were filed and
transferred to the U.S. District Court in Wilmington, Delaware. These cases have
been assigned to the same judge who is handling the Department of Justice
action. The class action filed on behalf of the dentists has been dismissed by
the plaintiffs. The private party suits seek damages in an unspecified amount.
The Company filed motions for summary judgment in all of the above cases which
motions were argued December 8, 2000. In March the Court issued a decision on
Dentsply's Motions. The Court denied the Motion for Summary Judgment regarding
the Department of Justice action, granted the Motion on the lack of standing of
the patient class action and granted the Motion on lack of standing of the
laboratory class action to pursue damage claims. These decisions mean that the
Department of Justice case will proceed, the patient class action is dismissed
and the laboratory class action cannot pursue damage claims in the current
litigation. Since that time, in an attempt to avoid the effect of the Court's
ruling, the attorneys for the laboratory class action have filed a new complaint
naming Dentsply and its dealers as co-conspirators with respect to Dentsply's
distribution policy. Four private party class actions on behalf of indirect
purchasers have been filed in California. These cases are based on allegations
similar to those in the Department of Justice case. In response to the Company's
motion, these cases have been consolidated in one Judicial District in Los
Angeles. It is the Company's position that the conduct and activities of the
Trubyte Division do not violate the antitrust laws.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 2001.
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Signatures
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.
DENTSPLY INTERNATIONAL INC.
May 15, 2001 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
May 15, 2001 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
18