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, 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 August 5, 2001 the
Company had 51,819,452 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 19
1
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended June 30, 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 Interim 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 4 - Submission of Matters to a Vote of Security Holders.......... 18
Item 6 - Exhibits and Reports on Form 8-K............................. 18
Signatures............................................................... 19
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
(in thousands, except per share amounts)
Net sales $ 254,635 $ 224,788 $ 500,304 $ 438,744
Cost of products sold 120,908 106,357 236,763 209,838
Gross profit 133,727 118,431 263,541 228,906
Selling, general and administrative expenses 89,391 78,700 178,784 152,435
Restructuring costs (Note 6) -- -- 5,500 --
Operating income 44,336 39,731 79,257 76,471
Other income and expenses:
Interest expense 4,296 2,679 7,877 5,679
Interest income (240) (452) (484) (841)
Other (income) expense, net (888) 169 (23,720) 192
Income before income taxes 41,168 37,335 95,584 71,441
Provision for income taxes 13,764 12,708 33,854 24,622
Net income $ 27,404 $ 24,627 $ 61,730 $ 46,819
Earnings per common share (Note 3):
Basic $ 0.53 $ 0.47 $ 1.19 $ 0.90
Diluted 0.52 0.47 1.18 0.89
Cash dividends declared per common share $ 0.06875 $ 0.06250 $ 0.13750 $ 0.12500
Weighted average common shares outstanding:
Basic 51,748 51,912 51,695 52,113
Diluted 52,618 52,378 52,471 52,459
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
June 30, December 31,
2001 2000
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 16,960 $ 15,433
Accounts and notes receivable-trade, net 136,452 133,643
Inventories, net (Notes 1 and 5) 154,672 133,304
Prepaid expenses and other current assets 41,871 43,074
Total Current Assets 349,955 325,454
Property, plant and equipment, net 185,515 181,341
Identifiable intangible assets, net 165,094 80,730
Costs in excess of fair value of net
assets acquired, net 410,432 264,023
Other noncurrent assets 51,827 15,067
Total Assets $ 1,162,823 $ 866,615
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 45,063 $ 45,764
Accrued liabilities 101,220 88,058
Income taxes payable 36,015 33,522
Notes payable and current portion
of long-term debt 1,480 794
Total Current Liabilities 183,778 168,138
Long-term debt 340,116 109,500
Deferred income taxes 25,257 16,820
Other noncurrent liabilities 46,642 47,226
Total Liabilities 595,793 341,684
Minority interests in consolidated subsidiaries 4,355 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 June 30, 2001 and
December 31, 2000 543 543
Capital in excess of par value 152,945 151,899
Retained earnings 544,783 490,167
Accumulated other comprehensive loss (67,519) (49,296)
Unearned ESOP compensation (4,179) (4,938)
Treasury stock, at cost, 2.5 million shares
at June 30, 2001 and 2.6 million at December 31, 2000 (63,898) (68,005)
Total Stockholders' Equity 562,675 520,370
Total Liabilities and Stockholders' Equity $ 1,162,823 $ 866,615
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
4
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
---------------------------------
2001 2000
(in thousands)
Cash flows from operating activities:
Net income $ 61,730 $ 46,819
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 12,999 11,932
Amortization 13,428 9,709
Restructuring and other costs 5,500 --
Gain on sale of business (23,121) --
Other, net 1,010 (3,812)
Net cash provided by operating activities 71,546 64,648
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (201,691) 1,274
Additional consideration for prior purchased businesses (84,627) --
Capital expenditures (24,376) (13,510)
Other, net 1,085 (865)
Net cash used in investing activities (309,609) (13,101)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs 283,436 79,194
Payments on long-term borrowings (52,229) (102,868)
(Decrease) increase in short-term borrowings (3,573) 1,088
Cash paid for treasury stock (875) (26,500)
Cash dividends paid (7,101) (6,541)
Other, net 5,068 2,279
Net cash provided by (used in) financing activities 224,726 (53,348)
Effect of exchange rate changes on cash and cash equivalents 14,864 1,417
Net increase (decrease) in cash and cash equivalents 1,527 (384)
Cash and cash equivalents at beginning of period 15,433 7,276
Cash and cash equivalents at end of period $ 16,960 $ 6,892
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 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 June 30, 2001,
the cost of $14.9 million or 10% of inventories was determined by the
last-in, first-out (LIFO) method. At 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 $0.3 million lower in the six months ended June 30, 2001
and $0.2 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
June 30, 2001 by $0.1 million and lower than reported at December 31, 2000 by
$0.2 million.
NOTE 2 - COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
(in thousands)
Net income $ 27,404 $ 24,627 $ 61,730 $ 46,819
Foreign currency translation adjustments (1,907) (811) (16,787) (5,085)
Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133) -- -- (503) --
Net loss on derivative financial
instruments 538 -- (933) --
Total comprehensive income $ 26,035 $ 23,816 $ 43,507 $ 41,734
6
The balances included in accumulated other comprehensive loss in the
consolidated balance sheets are as follows:
June 30, December 31,
2001 2000
(in thousands)
Foreign currency translation adjustments $ (65,412) $ (48,625)
Net loss on derivative financial
instruments (1,436) -
Minimum pension liability (671) (671)
$ (67,519) $ (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 Six Months Ended
June 30, June 30,
2001 2000 2001 2000
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $27,404 $24,627 $61,730 $46,819
Denominator:
Common shares outstanding 51,748 51,912 51,695 52,113
Basic EPS $ 0.53 $ 0.47 $ 1.19 $ 0.90
Diluted EPS Computation
Numerator (Income) $27,404 $24,627 $61,730 $46,819
Denominator:
Common shares outstanding 51,748 51,912 51,695 52,113
Incremental shares from assumed exercise
of dilutive options 870 466 776 346
Total shares 52,618 52,378 52,471 52,459
Diluted EPS $ 0.52 $ 0.47 $ 1.18 $ 0.89
Options to purchase 2,600 and 84,300 shares of common stock that were
outstanding during the quarter ended June 30, 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. Antidilutive
options outstanding during the six months ended June 30, 2001 and 2000 were
36,600 and 579,200, respectively.
NOTE 4 - BUSINESS ACQUISITIONS/DIVESTITURES
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 million, 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.
7
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 was 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% was made on July 1, 2001. In
accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", the goodwill associated with this
acquisition will not be amortized. 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 provided 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 seller chose the two-year
period ended December 31, 2000 and the final earn-out payment of $84.6
million was made in May 2001.
In May 2001, the Company entered into an agreement to purchase Degussa
Dental Group ("Degussa Dental"), a unit of Degussa AG, for 576 million euros
or approximately $500 million. Degussa Dental is a global provider of dental
materials to the professional dental products industry, specializing in
precious metal dental alloys and ceramics. It is the world's second largest
dental company and the market leader in Germany and Europe and the only
significant non-domestic dental company in the Japanese market. Headquartered
in Hanau-Wolfgang, Germany since 1992, Degussa Dental Group has modern
production facilities throughout the world. This transaction is expected to
close late in the third quarter or early in the fourth 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 $ 15,594 $ --
Property, plant and equipment 3,872 6,593
Identifiable intangible assets and costs in excess of
fair value of net assets acquired 97,227 90,204
Other long-term assets 460 --
Current liabilities (12,259) --
$ 104,894 $ 96,797
8
Assuming that the acquisitions of Friadent and AZ had occurred on January
1, 2000, the results of operations would have approximated the following in
comparison to the reported results:
As Reported Pro Forma with AZ and Friadent
Six Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
Net sales $ 500,304 $ 438,744 $ 508,093 $ 498,517
Net income 61,730 46,819 62,158 48,406
Earnings per common share
Basic $ 1.19 $ 0.90 $ 1.20 $ 0.93
Diluted 1.18 0.89 1.18 0.92
NOTE 5 - INVENTORIES
Inventories consist of the following:
June 30, December 31,
2001 2000
(in thousands)
Finished goods $ 98,452 $ 84,436
Work-in-process 26,150 22,102
Raw materials and supplies 30,070 26,766
$ 154,672 $ 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.
Approximately 45 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 first quarter
of 2002. The major components of this restructuring charge and the remaining
outstanding balances are as follows:
Amounts
Applied Balance
2001 During June 30,
Provision 2001 2001
(in thousands)
Severance $ 3,130 $ (873) $ 2,257
Other costs 2,370 - 2,370
$ 5,500 $ (873) $ 4,627
9
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 25 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 June 30,
Provision 2000 2001 2001
(in thousands)
Severance $ 2,299 $ (611) $ (618) $ 1,070
Other costs 403 - (22) 381
$ 2,702 $ (611) $ (640) $ 1,451
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 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 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.
10
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.
For the period ended June 30, 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 June 30, 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 June 30, 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 June 30, 2001, $7.6 million of net gains related to
the Swiss franc-denominated debt were included in the Company's foreign
currency translation adjustment.
Other
As of June 30, 2001, the Company had recorded the fair value of derivative
instrument liabilities of $0.2 million in "Accrued liabilities" and $0.2
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. Net gains or losses
related to these long-term intercompany loans, those for which settlement is
not planned or anticipated in the foreseeable future, are included in the
Company's foreign currency 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. 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. After the Court's decision, in an attempt to avoid the
effect of the Court's ruling, the attorneys for the laboratory class action
filed a new Complaint naming Dentsply and its dealers as co-conspirators with
respect to Dentsply's distribution policy. Dentsply has filed a Motion to
Dismiss this re-filed action. 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 June 30, 2001 Compared to Quarter Ended June 30, 2000
For the quarter ended June 30, 2001, net sales increased $29.8 million, or
13.3%, to $254.6 million, up from $224.8 million in the same period of 2000.
Base business sales (internal sales growth exclusive of
acquisitions/divestitures and the impact of currency translation) grew 5.2%.
This growth was achieved over both large equipment and consumable (which
includes small equipment) product categories. The impact of currency
translation had a negative effect of 2.6% on the second quarter results
compared to the comparable period in 2000 due to the further strengthening of
the U.S. dollar against most global currencies while acquisitions in 2001,
net of divestiture, had a positive 10.7% impact on net sales growth.
Sales in the United States for the second quarter grew 12.1%. Base business
sales growth in the U.S., up 7.5%, was the result of increases in both
consumable and large equipment lines. Strong growth was achieved in teeth,
endodontics, orthodontics, intraoral cameras and digital x-ray systems.
Acquisitions, net of divestitures, added 4.6% to net sales in the U.S. during
the second quarter.
European sales, including the Commonwealth of Independent States ("C.I.S."),
increased 18.2% during the second quarter of 2001. European base business
sales increased 1.1%. Currency translation had a negative 5.8% effect on the
quarter in Europe. Acquisitions added 22.9% to European sales during the
quarter. While equipment base business sales in Europe were strong, the
consumable and small equipment base business sales growth in Europe was soft
due mainly to the Maillefer fire and a difficult transition into the European
central warehouse.
Asia (excluding Japan) base business sales increased 9.7% as the Asian dental
markets remained solid. Latin American base business sales declined 1.4%
during the second quarter 2001, primarily due to a recession in Brazil and
Argentina, the two key Latin American markets. In addition, a sales policy
change in pricing and terms has had a short-term impact on business in
Brazil. Sales in the rest of the world grew 16.4%: 3.3% from base business
primarily in Africa, Japan and Australia; less 4.5% from the impact of
currency translation plus 17.6% from acquisitions.
Gross profit grew 12.9% in the second quarter due to higher sales. The 52.5%
second quarter 2001 gross profit percentage was lower than the 52.7% gross
profit percentage for the second quarter of 2000. This decline was due
mainly to the negative impact of a stronger U.S. dollar in 2001 and costs
associated with acquisitions.
Selling, general and administrative (SG&A) expense increased $10.7 million,
or 13.6%. As a percentage of sales, expenses increased slightly from 35.0%
in the second quarter of 2000 to 35.1% for the same period of 2001 due to
recent acquisitions. SG&A spending, excluding acquisitions, represented
34.8% of sales during the second quarter of 2001 compared to 35.1% for the
same period in 2000. This decrease is mainly due to lower legal expenses.
Net interest expense increased $1.8 million in the second quarter of 2001 due
to higher debt levels in 2001 to finance the Friadent and AstraZeneca
acquisitions and the Tulsa earn-out, offset somewhat by strong operating cash
flow and savings in interest expense resulting from further utilization of
lower rate Swiss debt in the second quarter of 2001. Other income increased
$1.1 million in the second quarter of 2001 from favorable currency
transaction fluctuations and the preferred stock dividends due from
PracticeWorks resulting from the sale of InfoSoft, LLC ("InfoSoft") in the
first quarter of 2001.
13
The effective tax rate for operations was lowered to 33.5% in the second
quarter of 2001 compared to 34.0% in the second quarter of 2000 reflecting
savings from federal, state and foreign tax planning activities.
Net income increased $2.8 million, or 11.3% from the second quarter of 2000
and diluted earnings per common share were $0.52, an increase of 10.6% from
$0.47 in the second quarter of 2000, including a negative $.02 per common
share impact for amortization and interest associated with the Tulsa earn-out
payment made in May, 2001.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Net sales for the six months ended June 30, 2001 were $61.6 million, or
14.0%, above the comparable period in 2000, including 10.3% for
acquisitions. Excluding acquisitions and the InfoSoft divestiture, base
business net sales for the six months ended June 30, 2001 were up 6.1% at
2001 actual exchange rates for both periods (constant exchange rates), up
3.7% at reported exchange rates. This growth was achieved over both large
equipment and consumable (which includes small equipment) product
categories. The impact of currency had a 2.4% negative impact as the U.S.
dollar remained strong against most global currencies adversely affecting the
comparison to the prior year.
Sales in the United States for the first half grew 11.8%. Base business
growth in the U.S., up 8.0%, was achieved across both consumable and
equipment lines. Notable growth was achieved in endodontics, orthodontics,
intraoral cameras and digital x-rays systems. Acquisitions, net of
divestitures, added 3.8% to net sales in the U.S. during the first half of
2001.
European sales, including C.I.S., increased 18.7% during the first six months
of 2001. European base business sales increased 2.7%. Currency translation
had a negative 5.0% effect on the same period. Acquisitions added 21.0% to
European sales during the first six months of 2001. While equipment base
business sales in Europe were strong, the consumable and small equipment base
business sales growth in Europe was soft due mainly to the Maillefer fire and
a difficult transition into the European central warehouse.
Asia (excluding Japan) base business sales increased 12.7% as the Asian
dental markets remained solid. Latin American base business sales decreased
0.2% during the first half of 2001 primarily due to a recession in Brazil and
Argentina, the two key Latin American markets. In addition, a sales policy
change in pricing and terms has had a short-term impact business in Brazil.
Sales in the rest of the world grew 24.7%: 4.8% from base business primarily
in Africa, Japan, and Australia; less 4.9% from the impact of currency
translation plus 24.8% from acquisitions.
Gross profit grew 15.1% in the first six months of 2001 due to higher sales.
The 52.7% first half 2001 gross profit percentage was higher than the 52.5%
gross profit percentage for the first half of 2000. Gross profit margins
benefited from restructuring and operational improvements and a favorable
product mix offset somewhat by the negative impact of a strong U.S. dollar
and costs associated with acquisitions, including the amortization of
inventory step-up in 2001.
Selling, general and administrative (SG&A) expenses increased $26.3 million,
or 17.3%. As a percentage of sales, expenses increased from 34.7% in the
first six months of 2000 to 35.7% for the same period of 2001. The recent
acquisitions accounted for 0.8 percentage points of the rate increase. The
increased SG&A spending also includes the additional sales and marketing
expenses due to the North American sales conference held in February 2001
which brought together 700 Dentsply field sales people at one venue and the
bi-annual International Dental Society (IDS) meeting held in Cologne, Germany
in March, 2001.
Net interest expense increased $2.6 million in the first half of 2001 due to
higher debt levels in 2001 to finance the Friadent and AstraZeneca
acquisitions and the Tulsa earn-out, offset somewhat by strong operating cash
flow and savings in interest expense resulting from further utilization of
lower rate Swiss debt in the first quarter of 2001. Other income increased
$23.9 million in the first six months of 2001 reflecting the net gain on the
sale of SoftDent.
Net income increased $14.9 million, or 31.8% from the first half of 2000
including a $13.6 million after tax gain on the sale of InfoSoft and a $3.8
million after tax charge for restructuring recorded in the first quarter of
2001. Without the restructuring charge and the gain on the sale of InfoSoft,
net income was $51.9 million, up 10.9% from the first half of 2000, and
diluted earnings per common share were $0.99, an increase of 11.2% from $0.89
in the first half of 2001, including a negative $.02 per common share impact
from the Tulsa earn-out payment made in May 2001. This increase was due to
higher sales, higher gross profit margin, and lower income tax rate, offset
slightly by higher expenses as a percent of sales and higher interest expense
in the first half of 2001.
14
Quarter Ending September 30, 2001
In the third quarter of 2001, the Company plans to expense two $5 million R&D
milestone payments associated with the regulatory filings for ORAQIX , a
revolutionary gel based dental anesthetic. These expenditures are part of
the AstraZeneca dental anesthetic acquisition payments. We expect these
payments will be made late in the fourth quarter of 2001, however, the
expense will be recognized in the 3rd quarter of this year when the
regulatory filings are made. This charge will result in a one-time $0.17 per
share negative impact, which reflects only a small income tax benefit. The
Company also expects to generate a pre-tax gain of approximately $8.5 to $9.5
million in the third quarter related to the restructuring of its UK pension
arrangements. This is expected to have a one-time earnings-per-share benefit
of approximately $0.10 to $0.11 in the third quarter and a corresponding cash
benefit in the third quarter or fourth quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2001, cash flows from operating activities
were $71.5 million compared to $64.6 million for the six months ended June
30, 2000. The increase of $6.9 million results primarily from higher
earnings, increases in accrued liabilities and deferred income taxes offset
by an increase in inventory.
Investing activities for the six months ended June 30, 2001 include capital
expenditures of $24.4 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 half of 2001, the
Company repurchased 25,000 shares of its common stock for $0.9 million. The
Company does not plan to make any additional purchases of its common stock
under this program in 2001.
The Company's current ratio was 1.9 with working capital of $166.2 million at
June 30, 2001. This compares with a current ratio of 1.9 and working capital
of $157.3 million at December 31, 2000.
The Company had acquisition activity during the six months ended June 30,
2001 that has resulted or will result 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 at future dates. 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 was made on July 1,
2001 and the earn-out is based on future sales. In May 2001, the Company also
made an earn-out payment of $84.6 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. In May 2001, the Company entered into an agreement to purchase
Degussa Dental Group ("Degussa Dental"), a unit of Degussa AG, for 576
million euros or approximately $500 million. This transaction is expected to
close late in the third quarter or early in the fourth quarter of 2001. These
transactions are discussed in Note 4 of the Notes to Unaudited Interim
Consolidated Condensed 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
2001. In May 2001 the Company also replaced and expanded its revolving credit
agreements to $500 million from its previous level of $300 million.
Additionally, the Company intends to fund the Degussa Dental transaction
primarily through a long-term eurobond debt offering which is expected to be
finalized late in the third quarter of 2001.
The Company's long-term debt increased $230.6 million from December 31, 2000
to $340.1 million due to the acquisitions that closed through June 30, 2001.
The resulting long-term debt to total capitalization at June 30, 2001 was
37.7% 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 its existing credit facilities.
15
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 June 2001 FASB issued Statement of Financial Accounting Standards No. 141
("SFAS 141"), "Business Combinations" and Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". SFAS
141 addresses financial accounting and reporting for business combinations.
Specifically, effective for business combinations occurring after July 1,
2001, it eliminates the use of the pooling method of accounting and requires
all business combinations to be accounted for under the purchase method. SFAS
142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets. The primary change related to this new standard is
that the amortization of goodwill and intangible assets with indefinite
useful lives will be discontinued and instead an annual impairment approach
will be applied. Except for such intangibles acquired after July 1, 2001 (in
which case, amortization will not be recognized at all), the Company will
discontinue amortization on these intangible assets effective January 1,
2002. The Company expects this change in accounting to have a positive impact
on earnings per share of approximately $0.20 to $0.25 beginning in 2002.
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.
16
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. 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. After the Court's decision, in an attempt to avoid the
effect of the Court's ruling, the attorneys for the laboratory class action
filed a new Complaint naming Dentsply and its dealers as co-conspirators with
respect to Dentsply's distribution policy. Dentsply has filed a Motion to
Dismiss this re-filed action. 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.
17
Item 4 - Submission of Matters to a Vote of Security Holders
(a) On May 23, 2001, the Company held its 2001 Annual Meeting of
stockholders.
(b) Not applicable.
(c) The following matters were voted upon at the Annual Meeting, with the
results indicated:
1. Election of Class III Directors:
Votes Broker
Nominee Votes For Withheld Non-Votes
Michael J. Coleman 35,332,705 11,649,904 N/A
John C. Miles II 41,352,401 5,630,208 N/A
W. Keith Smith 46,164,416 818,193 N/A
2. Proposal to ratify the appointment of PricewaterhouseCoopers LLP,
independent accountants, to audit the books and accounts of the
Company for the year ending December 31, 2001:
Votes For:46,640,345 Votes Against: 289,751
Abstentions: 52,513 Broker Non-Votes: N/A
(d) Not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3.2 By-Laws, as amended
10.1 Degussa Dental Group Sale and Purchase Agreement, dated May 28/29,
2001 between Degussa AG (Seller) and Dentsply Hanau GmbH & Co. KG,
Dentsply Research & Development Corporation and Dentsply EU
S.a.r.l. (Purchasers and subsidiaries of the Company).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended June 30, 2001.
18
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.
August 14, 2001 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
August 14, 2001 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
19