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 September 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 November 5, 2001 the
Company had 51,899,220 shares of Common Stock outstanding, with a par value
of $.01 per share.
Page 1 of 22
DENTSPLY INTERNATIONAL INC.
FORM 10-Q
For Quarter Ended September 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............... 14
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk........................................... 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..................................... 21
Item 6 - Exhibits and Reports on Form 8-K...................... 21
Signatures........................................................ 22
2
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 200 2000
(in thousands, except per share amounts)
Net sales $ 253,501 $ 216,699 $ 753,805 $ 655,443
Cost of products sold 121,116 104,439 357,879 314,277
Gross profit 132,385 112,260 395,926 341,166
Selling, general and administrative expenses 87,975 74,123 266,759 226,558
Restructuring costs (Note 6) -- -- 5,500 --
Operating income 44,410 38,137 123,667 114,608
Other income and expenses:
Interest expense 4,872 2,538 12,749 8,217
Interest income (212) (95) (696) (936)
Other (income) expense, net 1,695 925 (22,025) 1,117
Income before income taxes 38,055 34,769 133,639 106,210
Provision for income taxes 12,136 11,434 45,990 36,056
Net income $ 25,919 $ 23,335 $ 87,649 $ 70,154
Earnings per common share (Note 3):
Basic $ 0.50 $ 0.45 $ 1.69 $ 1.35
Diluted 0.49 0.45 1.67 1.34
Cash dividends declared per common share $ 0.06875 $ 0.06250 $ 0.20625 $ 0.18750
Weighted average common shares outstanding:
Basic 51,834 51,665 51,742 51,963
Diluted 52,766 52,322 52,570 52,419
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
3
DENTSPLY INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(unaudited)
September December 31,
2001 2000
(in thousands)
Assets
Current Assets:
Cash and cash equivalents $ 11,879 $ 15,433
Accounts and notes receivable-trade, net 146,568 133,643
Inventories, net (Notes 1 and 5) 163,853 133,304
Prepaid expenses and other current assets 41,439 43,074
Total Current Assets 363,739 325,454
Property, plant and equipment, net 195,217 181,341
Identifiable intangible assets, net 172,081 80,730
Costs in excess of fair value of net
assets acquired, net 434,256 264,023
Other noncurrent assets 53,878 15,067
Total Assets $ 1,219,171 $ 866,615
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 47,515 $ 45,764
Accrued liabilities 113,719 88,058
Income taxes payable 46,782 33,522
Notes payable and current portion
of long-term debt 1,049 794
Total Current Liabilities 209,065 168,138
Long-term debt 343,153 109,500
Deferred income taxes 22,817 16,820
Other noncurrent liabilities 48,355 47,226
Total Liabilities 623,390 341,684
Minority interests in consolidated subsidiaries 2,260 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 September 30, 2001 and
December 31, 2000 543 543
Capital in excess of par value 153,210 151,899
Retained earnings 567,136 490,167
Accumulated other comprehensive loss (61,362) (49,296)
Unearned ESOP compensation (3,799) (4,938)
Treasury stock, at cost, 2.4 million shares
at September 30, 2001 and 2.6 million at December 31, 2000 (62,207) (68,005)
Total Stockholders' Equity 593,521 520,370
Total Liabilities and Stockholders' Equity $ 1,219,171 $ 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)
Nine Months Ended
September 30,
2001 2000
(in thousands)
Cash flows from operating activities:
Net income $ 87,649 $ 70,154
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 19,716 17,762
Amortization 20,933 14,393
Restructuring and other costs 5,500 --
Gain on sale of business (23,121) --
Other, net 7,282 10,035
Net cash provided by operating activities 117,959 112,344
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired (203,634) (12,474)
Additional consideration for prior purchased businesses (104,627) --
Capital expenditures (34,918) (20,292)
Other, net 3,188 (1,337)
Net cash used in investing activities (339,991) (34,103)
Cash flows from financing activities:
Proceeds from long-term borrowings, net of
deferred financing costs 358,048 90,236
Payments on long-term borrowings (125,908) (121,777)
Decrease in short-term borrowings (4,054) (5,281)
Cash paid for treasury stock (875) (38,367)
Cash dividends paid (10,662) (9,782)
Other, net 6,832 4,817
Net cash provided by (used in) financing activities 223,381 (80,154)
Effect of exchange rate changes on cash and cash equivalents (4,903) 2,797
Net (decrease) increase in cash and cash equivalents (3,554) 884
Cash and cash equivalents at beginning of period 15,433 7,276
Cash and cash equivalents at end of period $ 11,879 $ 8,160
<FN>
See accompanying notes to unaudited interim consolidated condensed financial statements.
</FN>
5
DENTSPLY INTERNATIONAL INC.
NOTES TO UNAUDITED INTERIM CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September 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 September 30,
2001, the cost of $15.2 million or 9% 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 $0.5 million lower in the nine months ended September
30, 2001 and $0.4 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 September 30, 2001 by $0.2 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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
(in thousands)
Net income $ 25,919 $ 23,335 $ 87,649 $ 70,154
Other comprehensive income:
Foreign currency translation adjustments 7,164 (9,606) (9,623) (14,691)
Cumulative effect of change in accounting
principle for derivative and hedging
activities (SFAS 133) -- -- (503) --
Net loss on derivative financial
instruments (1,007) -- (1,940) --
Total comprehensive income $ 32,076 $ 13,729 $ 75,583 $ 55,463
6
The balances included in accumulated other comprehensive loss in the
consolidated balance sheets are as follows:
September 30, December 31,
2001 2000
(in thousands)
Foreign currency translation adjustments $ (58,248) $ (48,625)
Net loss on derivative financial (2,443) --
Minimum pension liability (671) (671)
$ (61,362) $ (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 Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
(in thousands, except per share amounts)
Basic EPS Computation
Numerator (Income) $25,919 $23,335 $87,649 $70,154
Denominator:
Common shares outstanding 51,834 51,665 51,742 51,963
Basic EPS $ 0.50 $ 0.45 $ 1.69 $ 1.35
Diluted EPS Computation
Numerator (Income) $25,919 $23,335 $87,649 $70,154
Denominator:
Common shares outstanding 51,834 51,665 51,742 51,963
Incremental shares from assumed exercise
of dilutive options 932 657 828 456
Total shares 52,766 52,322 52,570 52,419
Diluted EPS $ 0.49 $ 0.45 $ 1.67 $ 1.34
Options to purchase 12,000 and 8,000 shares of common stock that were
outstanding during the quarter ended September 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 nine months ended September 30,
2001 and 2000 were 68,000 and 142,000, 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 was in
Stage III clinical trials at the time of the agreement. The $136.5 million
purchase price was 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. After an analysis
of the available clinical data to date, the Company has concluded that the
Oraqix product does not provide pain relief equivalent to that provided by
injectible anesthetic. As a result, the Company has decided not to proceed
under the existing contract terms with AstraZeneca regarding the Oraqix
product; however the Company is involved in discussions with AstraZeneca to
modify the contract and payment terms associated with this product.
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 in early July 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 October 2001, the Company completed the acquisition of Degussa Dental
Group ("Degussa Dental"), a unit of Degussa AG, pursuant to the May 2001 Sale
and Purchase Agreement. The preliminary purchase price for Degussa Dental was
548 million Euros or $504 million, which was paid at closing. The preliminary
purchase price is subject to increase or decrease, based on certain working
capital levels of Degussa Dental as of October 1, 2001. The Company expects
that the final purchase price will be approximately 576 million Euros or $530
million, plus restructuring and other costs associated with the acquisition
of approximately $25 million. In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets", the
goodwill and indefinite lived intangible assets associated with this
acquisition will not be amortized. Degussa Dental manufactures and sells
dental products, including precious metal alloys, ceramics and dental
laboratory equipment, and chairside products. 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.
8
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 $ 16,068 $ --
Property, plant and equipment 4,164 6,593
Identifiable intangible assets and costs in excess of
fair value of net assets acquired 96,542 92,132
Other long-term assets 1,071 --
Current liabilities (12,936) --
$ 104,909 $ 98,725
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
Nine Months Ended September 30, Nine Months Ended September 30,
2001 2000 2001 2000
Net sales $ 753,805 $ 655,443 $ 762,784 $ 737,824
Net income 87,649 70,154 87,626 70,969
Earnings per common share
Basic $ 1.69 $ 1.35 $ 1.69 $ 1.37
Diluted 1.67 1.34 1.67 1.35
NOTE 5 - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2001 2000
(in thousands)
Finished goods $ 106,505 $ 84,436
Work-in-process 26,976 22,102
Raw materials and supplies 30,372 26,766
$ 163,853 $ 133,304
9
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 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 first quarter
of 2002. The major components of this restructuring charge and the remaining
outstanding balances are as follows:
Amounts
Applied Balance
2001 During September 30,
Provision 2001 2001
(in thousands)
Severance $ 3,130 $ (1,180) $ 1,950
Other costs 2,370 (46) 2,324
$ 5,500 $ (1,226) $ 4,274
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 15 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 September 30,
Provision 2000 2001 2001
(in thousands)
Severance $ 2,299 $ (611) $ (426) $ 1,262
Other costs 403 -- (262) 141
$ 2,702 $ (611) $ (688) $ 1,403
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.
10
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.
Much 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.
For the period ended September 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 September 30, 2001, $0.7 million of deferred net losses on derivative
instruments recorded in accumulated other comprehensive income are expected
to be reclassified to current earnings during the next twelve months.
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.
11
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 September 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 September 30, 2001, $1.3 million of net losses related
to the Swiss franc-denominated debt were included in the Company's foreign
currency translation adjustment.
Other
As of September 30, 2001, the Company had recorded the fair value of
derivative instrument liabilities of $0.2 million in "Accrued liabilities"
and $1.6 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.
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. The attorneys for the patient class have also
filed a new action to avoid the effect of the Court's ruling. This action is
filed in the U.S. District Court in Delaware. 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.
12
NOTE 9 - OTHER EVENTS
On January 25, 2001, a fire broke out in one the Company's Swiss
manufacturing facilities. The fire caused severe damage to a building and to
most of the equipment it contained. The Company has assessed the damages and
anticipates having all of the lost production capacity replaced by the middle
of the fourth quarter. Minimal impacts to customer shipments occurred as a
result of the fire and the majority of these occurred in the second quarter
of 2001. The Company has worked closely with its insurers and anticipates
closing out most of the claims (with the exception of the building claim) in
the fourth quarter of 2001. The building claim settlement is anticipated in
the first half of 2002. 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 imposed by this fire will be recovered under its
various insurance policies.
13
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 September 30, 2001 Compared to Quarter Ended September 30, 2000
For the quarter ended September 30, 2001, net sales increased $36.8 million,
or 17.0%, to $253.5 million, up from $216.7 million in the same period of
2000. Base business sales (internal sales growth exclusive of
acquisitions/divestitures and the impact of currency translation) grew 6.3%.
This growth was achieved over both large equipment and consumable product
categories. The impact of currency translation had a negative effect of 1.3%
on the third quarter results compared to the comparable period in 2000 due to
the strong U.S. dollar against most global currencies while acquisitions in
2001, net of divestitures, had a positive 12.0% impact on net sales growth.
Sales in the United States for the third quarter grew 10.8%. Base business
sales growth in the U.S., up 6.7%, was the result of increases in both
consumable and large equipment lines. Strong growth was achieved in bone
grafting materials, endodontics, orthodontics, intraoral cameras and digital
x-ray systems. Acquisitions, net of divestitures, added 4.1% to net sales in
the U.S. during the third quarter.
European sales, including the Commonwealth of Independent States, increased
31.4% during the third quarter of 2001. European base business sales
increased 7.9%. Currency translation had a positive 0.3% effect on the
quarter in Europe. Acquisitions added 23.2% to European sales during the
quarter. Base business sales growth was strong across all major products
groups in Europe as performance at the European central warehouse improved
significantly during the third quarter.
Asia (excluding Japan) base business sales increased 8.3% despite slowing
economies in this region. Latin American base business sales declined 5.6%
during the third quarter 2001, primarily due to sharply contracting economies
in Brazil and Argentina, which negatively impacted growth throughout the
Latin American region. Sales in the rest of the world grew 46.9%: 9.1% from
base business primarily in Canada, Africa, and Australia; less 4.0% from the
impact of currency translation plus 41.8% from acquisitions.
Gross profit grew 17.9% in the third quarter due to higher sales. The 52.2%
third quarter, 2001 gross profit percentage was higher than the 51.8% gross
profit percentage for the third quarter of 2000. This increase was due to a
favorable product mix and improved operating efficiencies, offset by the
negative impact of a strong U.S. dollar in 2001.
Selling, general and administrative (SG&A) expense increased $13.9 million,
or 18.7%. As a percentage of sales, expenses increased from 34.2% in the
third quarter of 2000 to 34.7% for the same period of 2001 due to recent
acquisitions. SG&A spending, excluding acquisitions, represented 33.2% of
sales during the third quarter of 2001 compared to 34.2% for the same period
in 2000. This decrease is mainly due to lower legal expenses and a partial
recovery from the Healthco bankruptcy, which occurred in 1993.
14
Net interest expense increased $2.2 million in the third quarter of 2001 due
to higher debt levels in 2001 to finance the acquisition of Friadent and the
dental injectible anesthetic assets of AstraZeneca, the remaining 49%
acquisition of CeraMed and the Tulsa acquisition earn-out, offset somewhat by
strong operating cash flows and the further utilization of lower rate Swiss
debt. Other expense increased $0.8 million in the third quarter of 2001 due
primarily to currency transaction losses offset somewhat by the preferred
stock dividends due from PracticeWorks, Inc. resulting from the sale of
SoftDent in the first quarter of 2001.
The effective year to date tax rate for operations was 33.0% in the third
quarter of 2001 compared to 34.0% in the third quarter of 2000 reflecting
savings from federal, state and foreign tax planning activities.
Net income increased $2.6 million, or 11.1% from the third quarter of 2000
and diluted earnings per common share were $0.49, an increase of 8.9% from
$0.45 in the third quarter of 2000, including a negative $.03 per common
share impact from the Tulsa earn-out payment made in May 2001. Excluding
this impact, dilutive earnings per common share increased 15.6% in the third
quarter.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September
30, 2000
Net sales for the nine months ended September 30, 2001 were 15.0% above the
comparable period in 2000, including 10.9% for acquisitions. Excluding
acquisitions/divestitures, base business net sales for the nine months ended
September 30, 2001 were up 6.2% at 2001 actual exchange rates for both
periods (constant exchange rates), up 4.2% at reported exchange rates. This
growth was achieved over both large equipment and consumable product
categories. The impact of currency had a 2.0% 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 nine months grew 11.5%. Base
business growth in the U.S., up 7.6%, was achieved across both consumable and
large equipment lines. Notable growth was achieved in endodontics,
orthodontics, intraoral cameras and digital x-rays systems. Acquisitions,
net of divestitures, added 3.9% to net sales in the U.S. during the first
nine months of 2001.
European sales, including C.I.S., increased 22.4% during the first nine
months of 2001. European base business sales increased 4.2%. Currency
translation had a negative 3.4% effect on the period. Acquisitions added
21.6% to European sales during the first nine months of 2001. Large equipment
base business sales in Europe grew 18.5%, reflecting the continued strong
demand for digital x-ray and intraoral cameras. Consumable base business
sales growth in Europe has rebounded with growth achieved in the endodontic
and German consumables businesses.
Asia (excluding Japan) base business sales increased 11.1% as the Company's
subsidiaries in the key Asian countries continued to gain market share.
Latin American base business sales decreased 2.1% during the first nine
months of 2001 primarily due to a recession in Brazil and Argentina, the two
key Latin American markets. Sales in the rest of the world grew 31.8%: 6.1%
from base business primarily in Canada, Africa, Japan, and Australia; less
4.6% from the impact of currency translation plus 30.3% from acquisitions.
For the first nine months of 2001, worldwide consumable base business sales
were up 6.3%, while large equipment base business sales increased 13.3%.
Gross profit grew 16.1% in the first nine months of 2001 due to higher
sales. The 52.5% gross profit percentage for the first nine months of 2001
was higher than the 52.1% gross profit percentage for the same period 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 the amortization of the Friadent inventory
step up in 2001.
Selling, general and administrative (SG&A) expenses increased $40.2 million,
or 17.7%. As a percentage of sales, expenses increased from 34.6% in the
first nine months of 2000 to 35.4% for the same period of 2001. The recent
acquisitions accounted for 1.2 percentage points of the rate increase. The
net decrease in base SG&A spending includes lower legal expenses and a
partial recovery from the Healthco bankruptcy which occurred in 1993. These
decreases more than offset the additional sales and marketing expenses due to
the North American sales conference held in February 2001 and the bi-annual
International Dental Society (IDS) meeting held in Cologne, Germany in March
2001.
The first nine months of 2001 included a $5.5 million pre-tax charge ($3.8
million after tax) for improving efficiencies in Europe, Brazil and North
America.
15
Net interest expense increased $4.8 million in the first half of 2001 due to
higher debt levels in 2001 to finance the acquisition of Friadent and the
dental injectible anesthetic assets of AstraZeneca, the remaining 49%
acquisition of CeraMed and the Tulsa earn-out, offset somewhat by a strong
operating cash flow and the further utilization of lower rate Swiss debt in
2001. Other income increased $23.1 million in the first nine months of 2001
due to the $23.1 million net gain on the sale of SoftDent.
Net income increased $17.5 million, or 24.9% from the first nine months of
2000 including a $13.6 million after tax gain on the sale of SoftDent and the
$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
SoftDent, net income was $77.8 million, up 10.9% from the first nine months
of 2000, and diluted earnings per common share were $1.48, an increase of
10.4% from $1.34 in the first nine months of 2000, including a negative $.05
per common share impact from the Tulsa earn-out payment made in May 2001.
Without this negative impact, diluted earnings per share increased 14.2%.
This increase was due to higher sales, higher gross profit margin, and a
lower income tax rate, offset slightly by higher expenses as a percent of
sales and higher interest expense in the first nine months of 2001.
Recent Developments
In October 2001, the Company generated a pre-tax gain of $8.5 million 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 and a
corresponding cash benefit in the fourth quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2001, cash flows from operating
activities were $118.0 million compared to $112.3 million for the nine months
ended September 30, 2000. The increase of $5.7 million results primarily
from higher earnings, increases in accrued liabilities and income taxes
payable offset by an increase in inventory.
Investing activities for the nine months ended September 30, 2001 include
capital expenditures of $34.9 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 nine months ended September
30, 2001, the Company repurchased 25,000 shares of its common stock for $0.9
million.
The Company's current ratio was 1.7 with working capital of $154.7 million at
September 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 nine months ended September
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, ranging between $20 million and $40 million, to be made
at future dates. Additionally, in March 2001, the Company entered into an
agreement for an early buyout 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 in early July 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. These
transactions are discussed in Note 4 of the Notes to Unaudited Interim
Consolidated Condensed Financial Statements.
16
In October 2001, the Company completed the acquisition of Degussa Dental
Group ("Degussa Dental"), a unit of Degussa AG, pursuant to the May 2001 Sale
and Purchase Agreement. Degussa Dental manufactures and sells dental
products, including precious metal alloys, ceramics and dental laboratory
equipment, and chairside products. The preliminary purchase price for Degussa
Dental was 548 million Euros or $504 million, which was paid at closing. The
preliminary purchase price is subject to increase or decrease, based on
certain working capital levels of Degussa Dental as of October 1, 2001. The
company expects that the final purchase price will be approximately 576
million Euros or $530 million, plus restructuring and other costs associated
with the acquisition of approximately $25 million. The Company has funded
this acquisition with a temporary short-term loan ("bridge financing"), the
private placement of notes with a major insurance company and the Company's
existing revolving credit facility. The Company intends to replace the bridge
financing and a portion of its outstanding balance under the bank revolving
credit facility with proceeds from a Eurobond offering, which is currently
planned for late November or early December. In addition, the Company plans
to sell the precious metals inventory acquired with the Degussa Dental
business to a third party and lease it back, with the proceeds being used to
pay down debt under the revolving credit facility. The Company estimates that
the proceeds from this sale will be approximately $70 million.
In order to fund these transactions, the Company completed a $150 million
five year average life private placements of debt, denominated in Swiss
francs at an average interest rate of 4.5% to 5.0% with a major insurance
company in March and October 2001. In May 2001, the Company also replaced and
expanded its revolving credit agreements to $500 million from its previous
level of $300 million.
The Company's long-term debt increased $233.7 million from December 31, 2000
to $343.2 million due to the acquisitions that closed through September 30,
2001. The resulting long-term debt to total capitalization at September 30,
2001 was 36.6% 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, and its planned Eurobond offering.
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 goodwill and intangible assets related to
acquisitions 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 is in the process of
analyzing all the effects of these standards' provisions. The Company
expects the application of these new standards will have a positive impact on
earnings per share of approximately $0.20 to $0.25 beginning in 2002.
17
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations". It applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) the normal
operation of a long-lived asset, except for certain obligations of lessees.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset and subsequently allocated to expense over the asset's
useful life. SFAS 143 is effective for fiscal years beginning after June 15,
2002. The Company is currently evaluating this new standard and has not yet
determined the full effect of adopting it.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets". SFAS 144 retains the current requirement to recognize
an impairment loss only if the carrying amounts of long-lived assets to be
held and used are not recoverable from their expected undiscounted future
cash flows. However, goodwill is no longer required to be allocated to these
long-lived assets when determining their carrying amounts. The new standard
requires that a long-lived asset to be abandoned, exchanged for a similar
productive asset, or distributed to owners in a spin-off be considered held
and used until it is disposed. However, SFAS 144 requires the depreciable
life of an asset to be abandoned be revised. SFAS 144 requires that
long-lived assets to be disposed of by sale be recorded at the lower of their
carrying amount or fair value less cost to sell and to cease depreciation
(amortization). Therefore, discontinued operations are no longer measured on
a net realizable value basis, and future operating losses are no longer
recognized before they occur. The provisions of SFAS 144 are effective for
fiscal years beginning after December 15, 2001. The Company is currently
evaluating this new standard and has not yet determined the full effect of
adopting it.
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.
CERTAIN RISK FACTORS
The following risk factors, in addition to the risks described in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000,
may cause actual results to differ materially from those in any
forward-looking statements in this report or made in the future by the
Company or its representatives:
The Dental Degussa Acquisition
Achieving the benefits of our acquisition of Degussa Dental will depend in
part on the integration of the operations and personnel of the two companies
in a timely and efficient manner in order to minimize the risk that the
acquisition will result in the loss of customers or key employees or the
continued diversion of the attention of management.
18
In general, we cannot offer any assurances that we can successfully integrate
the operations of DENTSPLY and Degussa Dental, and our failure to do so will
make it more difficult to achieve the cost savings and other benefits we
expect from the acquisition. In addition, the integration will require the
significant attention of management which could divert management's attention
from other important tasks.
Other risks include unanticipated expenses related to technology integration,
difficulties in maintaining uniform standards, controls, procedures and
policies, the impairment of relationships with employees and customers as a
result of any integration of new management personnel, unanticipated
difficulties in securing regulatory approvals required in order to sell
DENTSPLY's and Degussa Dental's products in foreign markets, the failure to
predict accurately the growth rate of markets for new and existing products
of the combined company, and the difficulties inherent in product innovation.
Financing
As at September 30, 2001, our long-term debt was U.S.$343.2 million
reflecting drawings under our revolving credit facility and a private
placement of debt securities. After giving effect to the expected total
acquisition costs of Degussa Dental, less the expected proceeds from the
planned sale of the precious metals inventory, our long-term debt as of
September 30, 2001 on a pro forma basis increased to $828.2 million.
Our ability to make payments on our indebtedness, and to fund our operations
depends on our future performance and financial results, which, to a certain
extent, are subject to general economic, financial, competitive, regulatory
and other factors that are beyond our control. After giving effect to the
acquisition of Degussa Dental, our ratio of long-term debt to total
capitalization as of September 30, 2001 on a pro forma basis was 58.3%. Our
level of debt, and any increase in our level of debt, has several important
effects on our future operations, including, without limitation: increasing
our vulnerability to general adverse economic and industry conditions;
limiting our ability to obtain additional financing to fund our general
corporate requirements; requiring the dedication of a substantial portion of
our cash flow from operations to the payment of principal of, and interest
on, our indebtedness, and exposing us to the risk of increased interest rates
since certain of our borrowings are at variable rates of interest.
Our existing borrowing documentation contains a number of covenants and
financial ratios which we are required to satisfy. Any breach of any such
covenants or restrictions would result in a default under the existing
borrowing documentation that would permit the lenders to declare all
borrowings under such documentation to be immediately due and payable and,
through cross default provisions, would entitle our other lenders to
accelerate their loans.
Competition
We conduct our operations, both domestic and foreign, under highly
competitive market conditions. Competition in the dental consumables and
equipment industries is based primarily upon product performance, quality,
safety and ease of use, as well as price, customer service, innovation and
acceptance by professionals and technicians. We believe that our principal
strengths include our well-established brand names, our reputation for
high-quality and innovative products, our leadership in product development
and manufacturing and our commitment to customer service and technical
support.
The worldwide market for dental supplies and equipment is highly competitive.
The size and number of our competitors vary by product line and from region
to region. There are many companies that produce some, but not all, of the
same types of products as those produced by us. Certain of our competitors
may have greater resources than we do in certain of our product offerings.
There can be no assurance that we will successfully identify new product
opportunities and develop and market new products successfully or that new
products and technologies introduced by competitors will not render our
products obsolete or non-competitive.
Regulation
Our products are subject to regulation by, among other governmental entities,
Food and Drug Administration (the "FDA"). In general, if a dental "device" is
subject to FDA regulation, compliance with the FDA's requirements constitutes
compliance with corresponding state regulations. In order to ensure that
dental products distributed for human use in the United States are safe and
effective, the FDA regulates the introduction, manufacture, advertising,
labeling, packaging, marketing and distribution of, and record-keeping for,
such products. Dental devices of the types sold by the company are generally
classified by the FDA into a category that renders them subject only to
general controls that apply to all medical devices, including regulations
regarding alteration, misbranding, notification, record-keeping and good
manufacturing practices. Our facilities are subject to periodic inspection by
the FDA to monitor our compliance with these regulations. There can be no
assurance that the FDA will not raise compliance concerns. Failure to
satisfy FDA requirements can result in FDA enforcement actions, including
product seizure, injunction, and/or criminal or civil proceedings.
19
In the European Union, our products are subject to the medical devices laws
of the various member states which are based on a Directive of the European
Commission. Such laws generally regulate the safety of the products in a
similar way to the FDA regulations. Our products in Europe bear the CE sign
showing that such products adhere to the European regulations
All dental amalgam filling materials, including those manufactured and sold
by us, contain mercury. Various groups have alleged that dental amalgam
containing mercury is harmful to human health and have actively lobbied state
and federal lawmakers and regulators to pass laws or adopt regulatory changes
restricting the use, or requiring a warning against alleged potential risks,
of dental amalgams. The FDA's Dental Devices Classification Panel, the
National Institutes of Health and the United States Public Health Service
have each indicated that no direct hazard to humans from exposure to dental
amalgams has been demonstrated. If the FDA were to reclassify dental mercury
and amalgam filling materials as classes of products requiring FDA pre-market
approval, there can be no assurance that the required approval would be
obtained or that the FDA would permit the continued sale of amalgam filling
materials pending its determination. In Europe, in particular in Scandinavia
and Germany, the contents of mercury in amalgam filling materials had been
the subject of public discussion. As a consequence, in 1994 the German health
authorities asked suppliers of dental amalgam to amend, as a precautionary
measure, the instructions for use for amalgam filling materials. We adhered
to this request. We also manufacture and sell non-amalgam dental filling
materials that do not contain mercury.
The introduction and sale of dental products of the types produced by us are
also subject to government regulation in the various countries around the
world in which they are produced or sold. Some of these regulatory
requirements are more stringent than those applicable in the United States.
We believe that we are in substantial compliance with all regulatory
requirements that are applicable to our products and manufacturing
operations.
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.
20
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. The attorneys for the patient class have also
filed a new action to avoid the effect of the Court's ruling. This action is
filed in the U.S. District Court in Delaware. 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 September 30, 2001. The Company filed a report on Form 8-K on
October 17, 2001 disclosing information related to the completion of the
acquisition of Degussa Dental Group.
21
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.
November 13, 2001 /s/ John C. Miles II
Date John C. Miles II
Chairman and
Chief Executive Officer
November 13, 2001 /s/ William R. Jellison
Date William R. Jellison
Senior Vice President and
Chief Financial Officer
22